Maximizing Shareholder Value is Fundamentally Flawed Idea
Just because an idea is endorsed by a Nobel prize winning Economist doesn’t mean the idea is right. The idea companies should focus on maximizing shareholder value is a classic example of this.
Prior to Milton Friedman’s endorsement, companies were managed for the benefit of their stakeholders. Stakeholders included customers, employees and the communities in which the companies were located as well as shareholders.
As the idea of maximizing shareholder value took hold in the 1980s, this changed. Companies now became run by the results of an MBA’s spreadsheet.
If the spreadsheet said shareholder value was maximized by outsourcing jobs, then the company outsourced jobs. If the spreadsheet said shareholder value was maximized by minimizing inventory and having multi-national supply chains rather than local partners, then the company had multi-national supply chains.
Of course, the spreadsheet didn’t take into account the damage to either the employees or communities from outsourcing jobs. Of course, the spreadsheet didn’t take into account what happens if there is an interruptions to these multi-national supply chains.
Perhaps more damning, the spreadsheets didn’t take into account what happens if a critical component ceases to be manufactured. When a company no longer controls access to a critical component, not only are the value of its shares not maximized its very existence is threatened.
Why?
What happens if the company cannot access this component? As shown by the global car industry, it shuts down production as it cannot access the semiconductor chips it needs for its cars. And what is the value of a car manufacturer that stops manufacturing cars? (Hint: pretty darn close to zero.)
Reversing forty plus years of embracing this flawed idea will not be easy.
Why?
How do you bring back the local supply chains and manufacturing skills you exported?
What the Covid pandemic has shown is the need to relocate supply chains and production close to where the customers are. The challenge is going to be how to do this.