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Guest Bloggers

Michael Olenick: Shareholder Value Theory—Milton Friedman Redux

Michael Olenick: Shareholder Value Theory—Milton Friedman Redux

Michael Olenick: Shareholder Value Theory—Milton Friedman Redux

At Simon Associates Management Consultants (SAMC), we help companies “see, feel and think” with fresh eyes so they can step out of their current mindset and discover new opportunities that are often all around them. A lot of this shift in thinking has to do with value innovation, something our guest blogger Michael Olenick writes about in the following blog. Perhaps his points will trigger some ideas of your own that can help you grow your business…not by doing more, cheaper, but by capitalizing on the proprietary value of your solution to consumers' problems. This is the key to finding your Blue Ocean Strategy. Enjoy.

From Guest Blogger Michael Olenick

On September 13, 1970, Milton Friedman published the groundbreaking “The Social Responsibility Of Business Is to Increase Its Profits,” in The New York Times. The article is available, in PDF form, for subscribers from The New York Times website or you can read it here.

Friedman advanced the idea that managers are agents of shareholders and that the only purpose of for-profit businesses is to increase stock price.

Managers have been debating Friedman’s “Shareholder Value Theory” ever since but nobody seems to have found the most obvious flaw from the seminal article. Milton’s sermon was directed at GM management.

“Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades,” wrote the Nobel laureate.

The “reformers” (Friedman’s word) raved against called-for safer, more reliable, more fuel efficient and less polluting cars. In 1970. Many happened to be young college students, baby boomers, who would soon enough be old enough to buy cars.

Instead of listening to their up-and-coming customers, GM listened to Milton Friedman and continued to build clunky, crappy, unreliable cars because that strategy was profitable in the past. These cars were uglier than a blobfish and polluted “like a 19th century coal-fired factory,” as Wired magazine eloquently summarized the era. Their cars broke, blew up, hurt people, handled terribly and guzzled gas.

GM didn’t listen to the reformers but up-and-coming companies across the Pacific did. Japanese cars were fuel efficient, environmentally friendly, relatively safe and incredibly reliable. They were built by companies that took exceptional care of their workers who, in turn, cared exceptionally about their businesses and the products they built. Japanese executives were no doubt aware of Friedman’s theory and actively rejected the advice.

Did Toyota and Honda ignore shareholder value? With booming sales and sterling reputations, I imagine their shareholders were pleased. How about those GM shareholders that Friedman praised for voting against exploring social responsibilities? People who purchased GM stock in 1965 — the ones Friedman praised for voting down social policy considerations — did see their stock increase in value…in 1993 (ignoring inflation). Fifteen years after that, GM was bankrupt. I’m not sure how that constitutes shareholder value. Milton Friedman’s Exhibit A on shareholder value — the notion that GE must reject a call for “social responsibility” and ignore buyer demands — resulted in one of the worst business disasters in history: the gutting of General Motors.

In hindsight, no serious student of business, economics, law, history or engineering could argue that Friedman was correct.

In all fairness, many executives reject shareholder value theory. First are the business executives: those who run actual businesses, something Milton Friedman never did. Jack Welch called it “the dumbest idea in the world.” Paul Polman, former CEO of Unilever, referred to followers as a “cult.” Alibaba CEO Jack Ma reminds that “customers are number one; employees are number two and shareholders are number three.” Marc Benioff, founder and CEO of Salesforce, added it is “wrong...the business of business isn’t just about creating profits for shareholders.”

Great business executives understand that their business is tied to a broader ecosystem. Apple CEO Tim Cook famously told an analyst, when questioned about Apple’s use of renewable energy, “I don’t consider the bloody ROI,” adding that Apple does “a lot of things for reasons besides profit motive. We want to leave the world a better place than we found it.” Google’s founding motto was, “Don’t be evil.” They eventually dropped that because it set the bar too low. Facebook actively works on connectivity for poor countries. Well-managed businesses take care of their customers, employees and communities while earning a lot of money for shareholders. Poorly managed organizations — those driven by short-term goals — milk their customers, employees and the organization itself, dry.

Besides making no sense strategically, legal experts explain that Friedman’s theory that managers are agents with a responsibility to increase stock returns is simply wrong. Lynn Stout, distinguished professor of corporate and business law at Cornell Law School, argues that Friedman bungled the law; managers are legally not agents of shareholders. She wrote a book on the subject, "The Shareholder Value Myth." Prof. Stout writes, “the idea of a single shareholder value is intellectually incoherent. No wonder the shift to shareholder value thinking doesn’t seem to be turning out well — especially for shareholders.”

Despite the obvious failings, Shareholder Value Theory remains alive and well. The most recent example is Boeing that cut corners to get its 737MAX off the ground. Two of the planes went down, crashing due to predictable and known flaws. Boeing’s stock tanked and the Seattle firm was recently forced to borrow $10 billion.

There are surefire ways to increase shareholder value. The first lacks creativity but virtually always works: create a high value product or service your customers love and sell it at a reasonable price. Respect and listen to customers and noncustomers. Value innovate by finding factors of an offering that add cost and not value, then eliminating and reducing them to free up capital to raise and create new factors. Treat your employers, suppliers and beloved Blue Ocean advisors as partners, not adversaries.

Genuine shareholder value comes from value innovation, not petty games designed to boost short-term gains.

About Michael Olenick

Michael OlenickHaving worked extensively with SAMC’s European and Middle East clients on Blue Ocean Strategy, Dr. Michael Olenick now leads our Europe and Middle East division, helping our clients in those regions rethink their business strategies to sustain growth in fast-changing times. Even before the launch of the groundbreaking book, “Blue Ocean Strategy” (which has sold 4 million copies to date), Michael was a Blue Ocean Strategist, working with Blue Ocean Strategy co-founders W. Chan Kim and Renée Mauborgne since 2001. 

As an Executive Fellow at the INSEAD Blue Ocean Strategy Institute in Fontainebleau, France, Michael advises, consults, researches and teaches Blue Ocean Strategy throughout the world, helping companies from startups to Fortune 100s implement its highly successful business strategy. His research has been cited in leading business publications, including The New York Times, The Wall Street Journal, The Washington Post and Bloomberg, and it is also being taught by leading business schools.

For more on value innovation, check out these blogs and podcast

SAMC Guest Bloggers  

We have a select number of guest bloggers whom we have invited to share their insights with our readers. They bring different perspectives to the challenges of change, innovation and opening new market space...recurring themes here at SAMC. Please enjoy their viewpoints and share them with others.

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Andi Simon, Ph.D.
Corporate Anthropologist | President
Simon Associates Management Consultants
Info@simonassociates.net
@simonandi

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On Mar 11, 2020 6:00:00 AM

/ Andrea Simon

Categories: Blue Ocean Strategy, business model innovation

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