Journal: News & Comment

Wednesday, January 28, 2004
# 1:23:00 PM:

Profit and "shareholder value" do not make a company

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A link from Jason Kottke turns up this quote from the book Disclosing New Worlds:

A business develops an identity by providing a product or a service to people. To do that it needs capital, and it needs to make a profit, but no more than it needs to have competent employees or customers or any other thing that enables production to take place. None of this is the goal of the activity.

On a similar note, this past weekend's National Post newspaper had an excellent article by John Kay called "The Best Way to Get From A to Z" (Saturday, January 24, 2004, section RB1). It's only available in print or in the for-pay electronic edition, so here are some relevant quotes:

Oblique approaches are most effective in difficult terrain, or where outcomes depend on interactions with other people. Obliquity is the idea that goals are often best achieved when pursued indirectly.

Case study, ICI:

For most of the 20th century, ICI was Britain's largest and most successful manufacturing company. In 1987, ICI described its business purpose thus: "ICI aims to be the world's leading chemical company, serving customers internationally through the innovative and responsible application of chemistry and related science." [...]

[In 1991, ownership changes led to a] new mission statement: "Our objective is to maximize value for our shareholders by focusing on businesses where we have market leadership, a technological edge and a world competitive cost base." [...] The company translated this into an operational strategy by disposing of [its] interests in bulk chemicals to acquire a niche group of specialty businesses. [...]

The outcome was not successful in any terms, including those of creating shareholder value. The share price peaked in 1998, soon after the new strategy was announced. The decline since then has been relentless. The transition from industrial giant to mid-cap corporation took only 12 years.

Case study, Boeing:

Bill Allen [Boeing's CEO from 1945 to 1968] said that... "The greatest pleasure life has to offer is the satisfaction that flows from participating in a difficult and constructive undertaking." [...]

...following the acquisition of its principal U.S. rival, McDonnell Douglas, in 1997 [new CEO Phil Condit told Business Week that] the company's previous preoccupation with meeting "technological challenges of supreme magnitude" [...] would have to change. "We are going into a value-based environment where unit cost, return on investment and shareholder return are the measures by which you'll be judged." [...]

So Boeing's civil order book today lags that of Airbus, a European consortium whose aims were not initially commercial. [...] The company got too close to the Pentagon and faced allegations of corruption. [...] Boeing stock, US$48 when Condit took over, rose to US$70 as he affirmed the commitment to shareholder value; by the time of his enforced resignation in December 2003, it had fallen to US$38.

To sum up:

The most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. [...]

Unhappy businesses resemble one another; each successful company is successful in its own way. Business achievement depends on doing things that others cannot do and still find difficult to do even after others have seen the benefits they bring to the imitators. [...]

The great corporations of the modern world were not built by people whose overriding interest was wealth, profit, or shareholder value. To paraphrase [John Stuart] Mill: Their focus was on business followed not as a means, but as itself an ideal end. Aiming thus at something else, they found profit by the way.


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