Shareholder Primacy and How it Impacts Business Performance: A Q&A with Ed Chambliss

Author of A One-Legged Stool: How Shareholder Primacy has Broken Business (And What We Can Do About It), Ed Chambliss, explores the concept of shareholder primacy, how it impacts business and what organizations can do to break away from this limiting mentality to become truly successful.

Q1: What is ‘shareholder primacy’?

Shareholder primacy is the belief that shareholders are more important to a business’ success than any other stakeholder (such as employees, customers, or the community) and, as a result, businesses should put shareholder needs first whenever making decisions.

This has become synonymous with the idea of “maximizing shareholder value,” (i.e., regularly extracting as much money as possible to pay shareholders now – be it through dividends, stock buybacks, or actions that drive the share price higher – even if it means taking those funds from initiatives that could benefit the company, and its shareholders, in the future.)

Q2: What happened in the ‘70s that created the environment for this business philosophy to develop?

From the 1930s through the 1960s, business tended to follow a more inclusive approach called “managerialism,” where executives tried to balance the competing interests of various stakeholder groups to yield the best overall results.

By many measures, this model was extremely successful, overseeing the rise of the US as an economic superpower, flourishing innovation, rising employee wages, and a steady stream of dividend checks for shareholders. (In fact, the S&P 500 returned a compound average annual return of 7.5% during this time frame.) But, in the 1970s, the US economy hit a rough spot. Foreign competition increased, OPEC quadrupled the price of oil, inflation spiked, and unemployment rose, triggering a recession that lasted for almost two years.

Eager to return the economy to its previous prosperity, some economists, including Nobel Prize winner Milton Friedman, theorized that the best way forward was to focus on just one stakeholder (shareholders) and one goal (making them as much money as possible). They believed that this singular, monetary focus would remove inefficiencies from the system and that would benefit everyone. However, after 50 years, it’s clear that focusing on shareholders disproportionately favors them at the expense of everyone else.

Q3: What are the long-term impacts of shareholder primacy in organizations?

Shareholder primacy is inherently about the short-term. About cutting expenses to boost the bottom line now, to pay out a larger dividend this quarter, or to buy back shares today, rather than investing those funds into research and development, acquisitions, attracting better talent, or even lowering prices.

The problem, of course, is that when you don’t invest in the future, it becomes even harder to be genuinely profitable down the road – which then requires even more resource diversion to maintain shareholder expectations. It’s a downward spiral that becomes harder and harder to escape, because the cost of restoring balance becomes higher and higher.

Q4: How does focusing on shareholder primacy erode an organization’s ability to attract talent?

In two ways. Pulling away more money to pay shareholders competes with the funding you need to pay a competitive wage. This, of course, can limit your ability to acquire or retain those individuals who can really drive meaningful innovation and excellence within your organization.

Even if you are able to attract quality employees, the company’s inability to consistently fund their initiatives creates a culture of disappointment and futility, which will drive away talent, while also damaging the company’s brand on the labor market.

After all, why hire the best and brightest if you won’t greenlight their ideas?

Q5: Do you think shareholder primacy has played a part in how corporations are often characterized as ‘villainous’ and ‘predatory’?

Absolutely. One of the key attributes of villains is that they don’t really care about their victims. Sure, they may feign interest in order to get what they want, but at the end of the day, a villain’s agenda is to enrich themselves, with little regard as to how they do it.

Much in the same way, corporations will tell whoever they’re talking to that they are the most important stakeholder. They’ll tell customers that the company is “customer-centric”. They’ll tell their workforce that employees “always come first”. They’ll even tell government officials how “concerned” they are about the environment. Yet, the corporation’s actions clearly show that they are truly loyal to only one group: shareholders.

This conflict between words and deeds creates a large amount of cognitive dissonance and a reputation for being two-faced. It’s no wonder brand trust is at a record low.

Q6: What are the benefits of a human-focused approach?

When you stop segmenting people by one role they play and, instead, recognize the whole person, the conflicts of interest between stakeholder groups largely disappear and commonalities become apparent.

Yes, shareholders want capital gains, customers want a good value, and employees want a paycheck but, as human beings, they all want a million other things, including peace, justice, equality, art and music, a great meal with friends, and a sustainable environment for their kids.

If a company can recognize this, it can get busy creating value that people will pay for, work for, and invest in. And that can bring sustainable success for the company and all its constituents.

Q7: What is the biggest mistake you see companies make in balancing prosperity with being human-focused?

They view and pursue profit on one dimension – financial – so they fail to see how all their activity contributes to long-term success for the enterprise.

Free enterprise harnesses the power of individuals to improve the world, which provides the basis for any salable product or service. Just think of all the ways our lives have gotten better over the last few hundred years, thanks to business. Yet so many companies define prosperity solely in terms of financial outcomes.

We need to remember that human beings created corporations to serve us, not the other way around. So, the measure of a company’s success should be calculated from its overall impact. In how it improves the lives of its customers, the culture it provides for its employees, how it is a good neighbor in the community. Of course, making a financial profit is important, but that is the result of a company’s success, not a purpose unto itself.

Q8: How can businesses get in touch with the wants and needs of their customers – without uprooting the influence of shareholders?

Start by remembering that 100% of revenue comes from customers and 0% comes from investors. So, if shareholders want a return on their investment, the company must be successful at attracting and retaining customers.

Second, realize that their shareholders probably want more out of life than just money, so the company doesn’t always need to pay them in “cash”. Rather, they can reward their shareholders in multiple “currencies,” including improvements to society and the environment – things that customers are also willing to pay for.

To put it another way, customers and shareholders aren’t always at odds. Work to service the person behind the role and both will be enriched.

Q9: A lot of companies use the term ‘customer-centric’, but still put the needs of their shareholders first – what does it actually look like to be oriented around your customers?

Being oriented around your customers or around your shareholders should both equate to being oriented around a human being. Both customers and shareholders give money to the company, the only differences are what they receive in exchange and when.

A customer transaction usually trades value for immediate revenue, which the company needs to offset costs and be profitable. A shareholder invests their funds in the long-term health of the enterprise, betting indirectly that the company will be successful at satisfying customer needs so they can receive a payoff for this macro success down the road.

So, if a company focuses on satisfying human needs, they’re actually focused on both customers and shareholders at the same time.

Q10: Do you think the shift in priorities in incoming generations (ethical, political and social concerns, etc.) will lead to a move away from shareholder primacy?

I certainly hope so. While younger people have always rebelled against the way things are, today’s generations have access to much more information, and therefore even more power to challenge the status quo.

Additionally, the fact that young people today are more likely to be shareholders than their parents were at their age, means that if they put their investments where their mouths are, they could encourage companies to change their behavior to a more human-centric approach.

Q11: In your book, you advise companies to ‘show’ and ‘tell’ everyone about the kind of brand and ‘friend’ their organization is looking to become. How can this be done authentically – especially when so many brands get this kind of messaging wrong?

Most companies fail to speak and act authentically because they aren’t doing so from a place of authentic societal purpose. If your primary goal is to simply make as much money as possible, you’re certainly not going to lead with that when you’re talking to your customers, employees, or neighbors. Instead, the company tries to assume a public brand persona that is more acceptable for these communications.

Unfortunately, if the company’s actions don’t match its words, then everyone can see it is just an act. However, if a company starts from a genuine social purpose – one that is beneficial to more than just shareholders – it doesn’t have to manufacture this faux personality. It can speak and act from its core purpose, with everything automatically in alignment.

Q12: What would you say to CEOs and business leaders that have concerns about the impact of shareholder primacy but are afraid to take action?

Change can be scary, especially when that change involves telling someone that they’re not “our favorite” anymore. But, in the end, evolving away from shareholder primacy is about sustainability for the company. About charting a path that will allow the business to be successful not just this quarter, but in the long-term. And aren’t those the investments that shareholders say they want? Opportunities that will consistently reward them for years to come?

To be clear, making the shift away from shareholder primacy will be challenging, but if you set expectations, and let shareholders know that you’re going to pursue a more balanced approach to success, they won’t be surprised. Sure, some investors will leave, but others will take their place. And these new shareholders will want to know about your overall performance – how you’re achieving financial goals while making the world a better place.