Tag Archives: technology

Shareholder value and how it has damaged us all

Many years ago, in the book Crossing the Chasm, Geoffrey Moore described how Shareholder Value was a fundamental measure to aspire to and that to achieve it needed competitive advantage, etc. Now this man can be considered somewhat of a genius in developing what the world now understands as a means to get from exciting innovation to mass market in short swift, of course others of you may have thought that Crossing the Chasm was one of the 50 Sheds of Grey activities.

Despite this genius, I would argue that in the area of Shareholder Value he was wholly incorrect, in error in fact. The end result is we have short-term values and we have personnel management systems that rate with an intention of removing 20% of the personnel per year. In fact we have systems that severance the experienced and learned to make place for hiring the cheap, we have a centralised, benevolent dictatorship structure that is run on rules and regulations and not trust.

The toughest part, the part that many will struggle with, is the fact that the Shareholders are actually losing out from the huge returns that would be possible by grabbing at the short-term, loose change that is left on the table each quarter rather than the huge pot nearby.

Perhaps I am rushing you too quickly into this thinking. If you have read some of my past blogs you will know I am an advocate of looking to the past to find if there is anything that we can learn to help avoid the pitfalls of the present. I would venture that all the “Built to Last” companies, when they were formed, the founder had a vision to be in business to provide value to the customers. The passion was built into the whole offer, the risk undertaken in the belief that the vision would build something special. Perhaps more importantly, those hired were hired because they too aligned with the vision and had the passion to make it happen.

OK, still to fast. Let me think, I know. The thing I probably hate the most is ironing. However, I know a fun woman (really) who loves ironing, especially shirts. She has set herself up in business collecting, doing and delivering ironing. The next step would be to take on staff who are also keen on ironing and to build an ironing organisation (I cannot think of anything worse!) .. similar is going on with dog walking, gardening, house make-overs and more. The founder starts with a passion, not with Shareholder value in mind.

I personally felt this when I joined AMD in 1986. Jerry Saunders’s mantra was “People first and profits will follow” and the culture of the company was such that it was the passion for the whole offer (not just the product) and what it could do for the customer that drove the organisation. Whether it was inventing Ethernet with DEC, a single chip Modem, or Video DRAM, or Programmable Logic or Subscriber Line Card circuits or even Bit-slice (what?) the passion was there.

All the employees, and I mean all, believed in the founder’s mission to “delight the customers” and AMDers were of the same passion and drive across the planet. Some, in the early electronics days, now called IT or ICT, may even recall the “Chip a week programme”. Jerry told engineering and marketing to develop a chip a week for a year (I think they did something like 54 new devices) and power out of the doldrums. Its true, none of the chips made it to the big time, however it energised engineering and marketing to go on with a “can do” attitude. It was that passion which took AMD to AMD64 and changed the world (Intel had to copy AMD, … nah! … really?)

Then Jerry stepped down and the replacement (Hector Ruins, as the Motorola people I knew named him as he left them to join AMD) engaged the mantra “Shareholder Value” and the soul of AMD vanished, the “can-do” attitude vaporised, the belief in the mission to delight the customers disappeared. The cost cutting started, first the programmable logic, then the line card circuits, then non-volatile memory, then chipsets until all that remained was PC processors and a competitor the size of a small planet. A few sparks of innovation appeared, but were quickly snuffed out, then an acquisition of ATI at a time when the market stalled sent the firm into the abyss where it hangs on with its finger tips hoping to climb out.

More recently I have done some work with CISCO, HP and Microsoft and while the former was the leading light in how to engage a partner based channel and develop strategic market and customer engagements that are fulfilled by an informed and educated channel they have now been infected by the Shareholder Value virus. It’s now about quarterly contribution margin, that is high revenue at low-cost, and strategy is just to increase contribution margin quarterly. As for HP, well they are letting 27,000 people go this month and there is nothing to be gained from such action than an increase in Shareholder Value.

Of course, the HR department is told to run covert talent competitions along the lines of “the weakest link” and determine the top 80% and identify and remove the lower 20% to bring in new, young, inexperienced personnel to replace them.

This does reduce visible costs, however business is run by people for people. The annual exit of 20% of the personnel develops a destructive political environment where simply scrabbling to stay higher in the perceptions of others is of greater value than delivery in the role. Rather than motivate the personnel, train the personnel, engage in building cross-functional teams with the personnel they choose to simply keep removing using Pareto’s Principle.

Can I digress for a second. I think this short-term perspective has hit more than traditional business. For example, X-factor is all about rising to the top rapidly by being voted in by the public. Yet, looking back through all the winners since the shows started who is still filling stadiums and selling records in volume. If you have read anything about Elton John you will know he started on tour, in a van and built a craft and a following that eventually led to the highest ever selling album. He still fills stadiums even now. Billy Joel is another.

The debate in my head is how do we escape this short-term perspective, how do we encourage long-term strategic vision or is that something that is beyond change. Perhaps it needs Kodak, Nokia, DEC, Word Perfect, Sun, Honeywell, Nortel to lose their way and vanish to provide space for the new. For certain all those companies started with a vision, chased the Shareholder Value goal, lost the passion of their founder on the way and floundered.

Of course, the golden boy of the moment is Apple. Yet to be that golden boy they had to bring back their founder to re-install their vision. Jobs was certainly not thinking Shareholder Value when he engaged in making an MP3 player fun to use, a Phone able to run Apps, a tablet able to run the same Apps and all in a user-friendly way. It was about the passion to do it different, the passion to have fun with technology.

I think the only way to change this behavior is to legislate, to have long-term strategic growth deliver a significant tax break in a way that has investors benefit from keeping their stock in a business for 2-5 years regardless of how its performing. Some means of slowing the market pace. Either that or the stock market will react by the second and the company performance will migrate to weekly, or perhaps daily and any idea of strategic direction will be lost forever.