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Business Leaders agree – I am right!

There are three essential elements of the shift. First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners. – Capitalism for the Long Term

Serving the interests of all major stakeholders.  Sure, I call it “Farming” – I grew up around farming, so I understand it – and the author of the article frames it in terms of short-term and long-term profits.  Still, its the same theories working. A business must take care of everything – not just focus on profits – in order to be a long-term success.  The mindset today is all on “milk the market for everything its worth and bail!”

in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, communities, and the environment. Indeed, thoughtful advocates of value maximization have always insisted that it is long-term value that has to be maximized. 

Capitalism’s founding philosopher voiced an even bolder aspiration. “All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries,” Adam Smith wrote in his 1759 work, The Theory of Moral Sentiments“The wise and virtuous man,” he added, “is at all times willing that his own private interest should be sacrificed to the public interest,” should circumstances so demand.

This Interdependence of Business and Society is what I have been trying to get across.  It is the same interdependence of Garden and Soil.  You have to take care of the latter in order to grow the first.  Too many times, Big Business focuses on the short term at the expense of the long-term.

More-sensible CEO pay.

An important task of governance is setting executive compensation. Although 70% of board directors say that pay should be tied more closely to performance, CEO pay is too often structured to reward a leader simply for having made it to the top, not for what he or she does once there. Meanwhile, polls show that the disconnect between pay and performance is contributing to the decline in public esteem for business.
CEOs and other executives should be paid to act like owners. Once upon a time we thought that stock options would achieve this result, but stock-option- based compensation schemes have largely incentivized the wrong behavior.
Again, echoing what I’ve been saying.  CEO compensation is completely out of sync with reality.  I’ll go with another analogy here – you have to feed the entire body to remain healthy, you can’t just feed the head and ignore the rest.  Imagine a skinny, frail body with an enormous, fat head and you have an image of most modern corporations.  A heavily compensated CEO and Executive group, starving workers, middle management and customer base.

I would also like to point out a comment on the article :

The interesting bit is that succeeding in the long term requires less effort and stress than short-term success. If you plant a garden in the spring, and tend it through the summer, you will usually get a nice harvest in the fall. You can try to “rush” the fruit, but it tales a lot of effort and input and the marginal reward is low for time and money that could be more productively spent elsewhere.

Long term success is less about Hard Work and Stress and more about Focus, Planning, and Patience.

David Kaiser, PhD
Executive Coach and CEO

It appears that I am not the only one who likens running a business to farming and gardening.

I’ve also seen comments that state, “businesses exist to generate value for their shareholders.”  This statement is vastly in error.  There has never been a successful, long-term, above-board business created only to generate profit.  All legitimate businesses exist to provide goods or services in exchange for profit.  The statement is also a good pointer to what is wrong with business today – it puts profits before good business.

At the very least, Companies that exist to serve shareholders are going about business completely the wrong way.  Companies should exist to provide goods or services to meet a demand.  Profits are the byproducts of good business, not the primary reason for a company’s existence.  Companies that exist for the sole purpose of generating profits are frauds.  I strongly believe that the current woes of the economy exist because corporations have forgotten the primary purpose of good business.  Providing something of value to society (customers) should always be the primary purpose.  Profits should be viewed as the byproduct.

0 thoughts on “Business Leaders agree – I am right!”

  1. This is a very coherent and well explained post on how capitalism can be both a generator of wealth and fiscally responsible for the economy as a whole instead of the quarterly "take the money and run" mentality exhibited by large sections of our corporate sector.

  2. Bobby,
    Tying pay to performance for public companies may not bring down pay; it may increase it for those who perform and cut if for those who don't. The average may go or up or down, but the best paid will probably be paid more, ergo greater inequality and higher multiple of CEO pay to worker pay.

    Look at the way private company CEOs backed venture capital and buyout funds are paid. They get relatively modest compensation until a liquidity event and then management usually gets about 15-20% of the profits. Their pay is very closely tied to shareholder return and highly variable, but also can be extremely high.

    Tying pay to performance for public companies is an extremely good idea, and I heartily endorse it, but it may not have the consequences you expect.

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