March 20

Capitalism’s Achilles Heel


A few years back I read an article on Forbes that significantly altered my perspective in relation to how we measure business success. I can’t do the article justice here, (you really need to read it, it will change your perspective,) but suffice it to say that we’ve gotten ourselves into a dangerous habit.

In the United States (and many other countries) we’ve begun measuring business performance through the ability to maximize shareholder returns. This is absolutely the wrong metric. Focusing too much on quarterly growth and meeting analyst projections causes companies to think in terms of short-term gains, which often come at the expense of long-term real growth. In fact, Jack Welch himself said:

On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. […] Short-term profits should be allied with an increase in the long-term value of a company.

Instead, companies should be focusing on improving the lives of everyone they touch. One company that is doing a fantastic job of this is Johnson & Johnson. Their Credo (PDF) clearly states that they serve their customers, their employees, their communities, and their shareholders (in that order).

As companies focus their efforts on providing delightful experiences to their customers, their employees benefit through improved compensation and job satisfaction, their communities benefit through the improved quality of life of their citizens, and finally their shareholders benefit through fair, sustainable growth.

Capitalism is the most effective weapon we have available to fight the ills of society (e.g., poverty, hunger, lack of education, etc.), but that weapon is currently being misused.

What are your thoughts?

P.S. I would love to see the development of a new “Net Stakeholder Contribution” metric that would allow companies to justify serving all stakeholders rather than just their investors. Any suggestions as to how that could be calculated?


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