Shareholder value and maximizing shareholder value. Two terms that I really dislike. No – terms that I hate. Why do I feel this strongly about two concepts that have become so fundamental to private sector business? It’s because of the twisted way they are interpreted, the behavior they have come to drive, and the damage they inflict on lives and the long-term sustainability of businesses themselves.
Let’s back up a little bit and look at shareholder value - including what it was intended to be and, more importantly, what it has become.
If you look online, there are lots of definitions for “shareholder value”. You can choose from the calculation-based ones (from Qfinance: “The total return to the stockholders in terms of both dividends and share price growth, calculated as the present value of future free cash flows of the business discounted at the weighted average cost of the capital of the business less the market value of its debt”) or the investor-based ones (from Investopedia: “The value delivered to shareholders because of management's ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm's ability to efficiently increase the amount of free cash flow over time”) or even the management-based ones (from Wikipedia: “This management principle, also known under value based management, states that management should first and foremost consider the interests of shareholders in its business actions”).
If you look at these different definitions, you might find yourself thinking “Hey – this shareholder value stuff kind of makes sense”. The references to growing earnings, free cash flow, and “over time” sound sort of beneficial. The more objective definitions even seem to suggest a balanced and sustainable approach.
Unfortunately, what we see in practice is more along the lines of the last definition I offered above: … management should first and foremost consider the interests of shareholders in its business actions. In countless cases, a focus on maximizing shareholder value has changed management’s focus from the long-term to this quarter with decisions being made to maximize profit in the short-term while sacrificing the long-term.
There are lots of great articles written on this topic so I won’t go into it at length here.
Suffice it to say that making the shareholder the number one stakeholder has resulted in some pretty disastrous results for employees (e.g. job and wage cuts to reduce expenses and increase profitability), customers (e.g. the discontinuation of products and services at the insistence of activist shareholders), and society/the environment.
So how did what may have started out as a good idea, turn out so wrong?
Three reasons in my humble opinion: (1) a failure to balance/include the critical needs of all stakeholders appropriately in business planning and the assessment of success; (2) elevating the wrong stakeholder to the position of number 1 or most important stakeholder (what about the customer? without a paying customer, the shareholder loses in most cases); and (3) failing to think through the negative behaviors focusing so intently on the shareholder might actually produce.
While many businesses continue to focus on maximizing shareholder value, some have, in an effort to free themselves from the pressures to sacrifice the long-term for the short-term, decided to abandon the stock market and shareholders altogether.
So what does all this have to do with the orientation of governments anyway?
Well – more and more I hear the watchword phrase “respect for the taxpayer” coming from the lips of certain government leaders. While elected municipal officials are more likely to repeat this phrase, I suspect that it underlines thinking in many party offices at the provincial and federal levels - in my country at least.
While “respect for the taxpayer” sounds like a good idea, I worry that it’s turning into government’s version of maximizing shareholder value. Let me explain.
I believe that the original intent of the idea behind “respect for the taxpayer” might have been a good one - using taxpayer dollars wisely for the benefit of all citizens. However, lately, I believe that the term has translated into the elevation of the taxpayer to the position of the number one stakeholder of government, disrupting the fundamental requirement of government institutions to effectively balance the needs of other/all government stakeholders (including citizens at large).
You see, the problem is that taxpayers only represent a segment of our population/communities. In 2008, approximately one third of the US population (about 51 million people) had zero or negative tax liability. I don't know what this stat looks like in Canada but I bet that it's not that far off. Regardless, what it means is that focusing on serving the needs of taxpayers alone runs the risk of leaving the interests of a significant portion of any given population out of the benefit realization equation.
But what do taxpayers want anyway? And is it so different from what the population at large wants? It turns out that it depends on who you ask. If you ask this taxpayer, I would say that I want my government(s) to ask me to contribute a reasonable amount of tax and to use the tax dollars that we collectively contribute as wisely as possible (to provide us with strong infrastructures, and services and programs that will provide the maximum benefit for society both at home and beyond).
However, if you ask other taxpayers, they would say that they want government to keep their taxes as low as possible – full stop. More and more I find that the phrase “respect for the taxpayer” has become narrowly focused on meeting the expectations of this constituency. In a time that includes a drive to balanced books as a fiscal imperative, this narrow focus translates into drastic reductions in public service personnel, reduced infrastructure investments, reductions in programs and services, etc. This cut alone often hurts the non-tax paying members of our communities the most.
Don’t get me wrong – I know that governments cannot persist in living beyond their means. However, I worry that putting a sub-set of the public – activist taxpayers - on a pedestal as the primary stakeholder of our governments opens governments up to the risk of taking an unbalanced approach in their direction and decisions, and in their definition of success. Based on what I have seen to date, this puts the population and society at risk immediately and over the long term.
While the concept of respecting the taxpayer is a laudable one, governments would do well to learn the lessons experienced through the drive to maximize shareholder value in the private sector. I personally would like to see a broad, ongoing dialogue in government and public sector organizations about who ALL their stakeholders are; what each group wants, needs and expects; and how to effectively balance these various, sometimes competing, needs to best serve society as a whole – not just one segment of the population – in a way that shows respect to all by striving to achieve the goal of demonstrating the greatest value* for the money under their stewardship.
* a combination of stakeholder AND societal outcome(s), stakeholder experience, and price/cost