The latest twist in the story of capitalism

From the Royal Society for the Arts Tomorrow's Company Lecture, given by management consultant Allan Kennedy in London
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The end of the shareholder-value era of business is drawing near. It has had us in its grip for the last 20 years of the 20th century, as one by one, company after company has come to embrace a singular purpose: maximising shareholder value. Before long, however, the forces set off in reaction to the shareholder-value movement will become so strong that the movement will be condemned to the dustbin of history as an idea that didn't work.

The end of the shareholder-value era of business is drawing near. It has had us in its grip for the last 20 years of the 20th century, as one by one, company after company has come to embrace a singular purpose: maximising shareholder value. Before long, however, the forces set off in reaction to the shareholder-value movement will become so strong that the movement will be condemned to the dustbin of history as an idea that didn't work.

The concept of shareholder value had its origins in the accounting world when a group of academic accountants first pointed out that discounting future cash-flow streams was a better way of predicting future stock-price levels than poring over reported accounting measures of performance.

This valid observation might have remained a relatively dry argument among academics had its implications not been spotted by a new breed of investment bankers, a breed that came to be known as the leveraged buy-out specialists.

But business did not start out with such a single-minded obsession about achieving a single goal. Some of the great companies founded in the 19th century, such as Procter and Gamble and Unilever, were family enterprises that occupied generations of the founding families in building the businesses into great enterprises.

As business grew in the 20th century to become central to economic life, a new breed of founder-entrepreneur moved into the spotlight.

The dominant characteristic of these mid-20th century entrepreneurs is that they were technocrats - engineers, inventors or functional specialists. Given their backgrounds, these entrepreneurs introduced to the world notions of modern management and meritocratic personnel policies, in part to move beyond the often inbred and insular world of the earlier family companies.

Almost to a person, the intent of these entrepreneurs in founding their businesses, ranging from Ed Land of Polaroid to Bill Hewlett and Dave Packard of Hewlett-Packard to Sam Walton of WalMart, was to bring something of value to the world. That they became very wealthy in the process was still a by-product.

Times change, of course. As the 20th century raced to a conclusion, a lot of people began to notice that founding a business was a good way to become quite wealthy indeed. Some of the entrepreneurs of the last third of the 20th century were therefore more focused on the wealth they could create and less on how they achieved this wealth.

While the shareholder-value movement swept US business in the late 1980s and 1990s, it has been much slower to gain acceptance in Europe. Workers' rights to participate in the inner workings of top management are enshrined in law in Germany, making it much harder for companies to pursue the maximisation of welfare for one stakeholder, the shareholder, at the expense of others. Across much of Europe, long-term equity holdings of banks and insurance companies insulate management from the short- term pressures faced in the US.

Gerhard Schröder, the German Chancellor, was roundly criticised in 1999 for encouraging a bail-out for the ailing Philipp Holzmann AG and for speaking out against the takeover of the German company Mannesmann by its British competitor Vodafone AirTouch; however, his public rejection of the "Anglo-Saxon business model" drew considerable support from both the public and business circles.

In the UK and Europe, there is still time for companies to extract the best from shareholder value - especially the notion that performance counts and managers ought to be accountable for it - while avoiding the downside so many of their US counterparts face.

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