Chapter 3: Can executives change the ‘shareholder value’ machine?

So Chapter 1 explained Henry Ford’s philosophy, only for Chapter 2 to give modern ‘large corporations’ (including their executives and short-term shareholders) a bit of a slap around. You might reasonably ask whether executives can actually do anything about this, for the good of the organisation. That’s the subject of this chapter:

shareholder-value-machineSo let’s say that you are an executive of a shareholder-owned corporation. Who are you legally answerable to, and therefore in whose interests must you act?

This is the subject of another superb book, ‘The Corporation’ (2005) written by Joel Bakan. Here’s what he has to say about this:

“Corporations are created by law and imbued with purpose by law. Law dictates what their directors and managers can do, what they cannot do and what they must do. And, at least in…industrialised countries, as created by law…it compels executives to prioritise the interests of their companies and shareholders above all others and forbids them from being socially responsible – at least genuinely so.”

Bakan cites company law as establishing the principle that directors have a legal duty to put shareholders interests above all others1.

Now the last line of the Bakan quote might seem strange because ‘don’t all those companies provide us with corporate social and environmental responsibility statements?’ (i.e. on their websites and in a prominent position within their annual reports)

Bakan goes on to explain the apparent conflict:

“There is, however, one instance when corporate social responsibility can be tolerated – when it is insincere. The executive who treats social and environmental values as means to maximise shareholder wealth – not as an ends in themselves – commits no wrong.”

Now, this is pretty disturbing stuff! You might come back at me and say “but other laws and regulations will stop ‘em!” Mmm, it would be nice if that were so:

“For a company, compliance with law, like everything else, is a matter of [weighing up the] costs and benefits.”

Simply having laws and regulations isn’t going to protect the public. If the costs of meeting the ‘rules’ becomes exorbitant, the company will consider the legal and reputational costs of breaking (or ‘manipulating’) them as against the benefits to be derived….a small oil spill here, a dodgy tax deal there, with a sprinkling of marketing propaganda to cover up or divert attentions elsewhere.

[Quick side note: I recently watched the 1st Trump: Clinton debate and ‘the Donald’ referred to such logic as ‘smart business’…and why America needs him. Nice…not!]

Further, Bakan defines the concept of corporate externalisation:

“The corporation…is deliberately programmed, indeed legally compelled, to externalise costs without regard for the harm it may cause to people, communities and the natural environment. Every cost it can unload onto someone else is a benefit to itself, a direct route to profit.”

This illuminates the gulf between Dead Money power and the public good.

plastic-birdTake the really simple example of packaging for food and other consumables. Sure, the supermarket pays for the costs of the plastic…but they happily externalise the cost of dealing with this packaging once the item has been bought. “What do you mean it got into the sea and is killing stuff? Not our problem anymore!”

Are the big supermarkets bothered about this? Not really…but they become so if, and only when, we make it in their interests to be bothered…and you can be sure that, if they then make any improvements, their Public Relations (PR) machine will crow long and hard about how they are ‘making our world a better place’.

This is looking for good news out of what you are being forced to do, rather than doing the right things in the first place.

And beware of that supposed ‘good news’. The wonderful stuff (that they say) they are now doing, might not be so wonderful. I’ve just watched another episode of ‘Hugh’s war on waste’ and am appalled at big coffee’s2 attitude to coffee cups – they are perfectly comfortable with us all thinking that they are recyclable when they know that they aren’t. Nothing to see here – move along!

Now, I think that you and I know that we could dig up literally hundreds, if not thousands, of case studies over the years showing the harm caused to organisations and society by Dead Money…but let’s keep it real simple and just look at one that’s been in the media recently3:

Example: Mylan and the Epipen

epipenLet’s have a look at the drug company Mylan and their 2007 purchase of Epipen (an auto-injector of adrenaline, to counter an anaphylaxis reaction). The product had been around for many years and was making modest revenues of US$200m.

So here’s what Mylan came up with:

  • let’s strongly market it to concerned parents (so they feel morally compelled to buy more pens – for home, for school, for camp….);
  • let’s get laws passed that increase demand;
  • let’s get labelling rules changed that allow it to be marketed more widely;
  • let’s work hard on hindering competitors from bringing their substitute products to market
  • …let’s do whatever to push and protect this product.

And so, between 2008 – 2015: Mylan increased prices 400% (to US$600 for a twin-pack), sales rose to US$1 billion and the product margin went from 9% to 55%.

(Note: those price increases are the exact opposite of Ford’s success4)

But what of the customer (the public)? Well, as is often the case, the really needy people are the ones that suffer. Many parents of allergic children can no longer afford the best product (or the rising health insurance premiums). They have no choice but to take alternative actions, like:

  • carrying expired Epipens and hoping the drug still works; or
  • reverting to the old fashioned method of regular syringes, by paying a doctor to fill them with the drug…costing about $20… and hoping that it is administered correctly when the time comes.

Even officials in many states are training their medical technicians to use the old ‘regular syringes’ method so as to save hundreds of thousands of $ from their budgets.

…and, finally the dam burst: the story got out, with mainstream and social media waging war on Mylan’s CEO, Heather Bresch.

So, did Bresch do anything wrong? Who says? The shareholders had been ecstatic with her actions…at least until ‘we’ found out.

Has Bresch taken some steps to address the mess? Hell yes!…but only to defuse, protect and then, no doubt rebuild. Nothing has fundamentally changed. She might be ‘shamed’ into resigning (not looking likely)…but I hazard a guess that if this occurred:

  • her salary cheque (and share options) will likely comfort her;
  • there will be many job offers from other companies wanting to benefit from her ‘corporate acumen’; and
  • Mylan will look for, and easily find, a replacement CEO in her image.

So, where’s that much vaunted ‘purpose’ in all this? If you want to have a read about Mylan, their Mission and their Values then have a look here. The following words from Mylan’s website give me a lump in my throat, and tears in my eyes:

Doing what’s right is sacred to us. We behave responsibly, even when nobody’s looking.”

It reminds me of a rather nice Jon Stewart quote:

“If you don’t stick to your values when they’re being tested, they’re not values; they’re hobbies.”

If you were wondering about the insincerity part of Bakan’s quote above then I hope the Epipen example assists. Mylan’s demonstrable purpose is money, not its customers (the public).

It’s worth noting that Mylan’s short-termism has laid itself bare to disruption by those who (are seen to) champion the customer. I expect competing products to do well from this media saga, and new products to emerge.

We shall see how this affects Mylan…but they have clearly lost a great deal of trust from the public.

As an important side note: How many of Mylan’s employees do you think now love working for them vs. how many are embarrassed to say so? And what effect might this have?

The unholy alliance:

unholy-allianceThere is of course a further (and huge) problem implied within the above: Those short-term thinking shareholders have formed an unholy alliance with those they employ as their agents – the directors and executives. By which I am referring to share option incentives.

This isn’t new stuff – and I often reflect that not much in human history is!

Here’s what Henry Ford had to say about the stock [share] market nearly 100 years ago:

“The most common error of confusing money and business comes about through the operation of the stock market. And especially through regarding the prices on the exchange as the ‘barometer of business’. People are led to conclude that business is good if there is lively gambling upwards in stocks, and bad if the gamblers happen to be forcing stock prices down.

The stock market as such has nothing to do with business. It has nothing to do with the quality of the article…nothing to do with the output…it does not even increase or decrease the amount of capital used in the business. It is just a little show on the side.”

…and, to the highly problematic part:

“The state of the stock market may make a deal of difference to the officers and directors of a company if they are dabbling in the stocks and trying to make money out of the securities of the company instead of out of its service.

It’s interesting that Henry saw this point clearly so long ago. I wonder what he’d say to the size and nature of the modern share option incentive packages! This has become a modern ‘large corporate’ virus5, attacking at the heart of the (supposed) customer purpose.

To close:

So, we have:

  • A problem of dead money usurping purpose;
  • An ownership model that favours short-termism over doing the right things for the long term success of the business; and to cap it all…
  • Directors and Executives ‘bought’ by those short-term shareholders to keep it this way.

Many an executive could throw their hands up in the air and cry “I know…but what can I do?!”

In Chapter 4, I’ll put forward some alternative thinking – for ways to alter the ownership model and thus change the foundation for the good of all (including the shareholders).

Update: Link forwards to Chapter 4


1. Shareholders as King: If you want to really delve into: the detail on the ‘shareholder primacy’ issue; recent attempts to move to an ‘enlightened shareholder value’ concept; and the conclusion that little has really changed then here’s an in-depth paper that does that.

2. ‘Big Coffee’: Hugh investigated the (misleading) words and (contradictory) actions of Starbucks, Costa Coffee and Cafe Nero in the UK.

3. Wells Fargo: I had already written Mylan as the case study when I saw the Wells Fargo fraud come out in the media…I could have added this case, but I expect that you’ve got the point – lots and lots of big corporations focused on dead money power, not service power for the public.

If you don’t know about, but would like to read up on the Wells Fargo case, then here’s a link.

4. Price: Henry Ford constantly sought ways to reduce his costs and pass these savings onto his customers (the public) by reducing the price of his cars. The price of a Model T ford dropped from $850 when it was introduced, to $260. (Source for price info.)

5. That ‘Unholy Alliance’: Just in case you were wondering (and this note is mainly for the benefit of shareholders), studies have examined the link between the introduction of executive incentive (i.e. share) packages and shareholder value – and it hasn’t exactly worked out well for the shareholders! A book to read here would be ‘Fixing the game’ by Roger Martin.

A recent study of 1,500 large corporations by Raghavendru Rau (Finance Professor at Judge Business School) found that:

“shares in firms that paid their CEOs in the top 10% of incentive pay [i.e. with high executive ‘incentive’ packages] typically saw their share price decline – and they fared considerably worse than the shares of companies in the bottom 10% [ i.e. with no or little executive incentive packages]”

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