In the past 25 years, CEOs of many major corporations have relied on a flawed set of beliefs to lead their organizations. This set has influenced them to place way too much emphasis on maximizing shareholder value and not enough on generating value for society. Today we are mired in the Great Recession, which was brought about by the near collapse of the financial system. This environment and the behavior produced by the prevailing set of beliefs to which CEOs subscribe have deepened a widespread public distrust of corporations and capitalism.
The Conventional Wisdom
Most CEOs and corporate board members would agree that the theories and beliefs listed below drive their decision-making on how best to meet the challenges they face:
– The focus of the CEO and the board should be on maximizing shareholder value.
– The stock market is short-term-oriented.
– Stock-based incentive compensation aligns the self-interest of management with shareholders, and a performance-based pay system increases employee motivation.
– Societal concerns should be addressed through corporate social responsibility programs.
– The “best athlete” from inside or outside the company should be chosen as the successor to the CEO.
These beliefs have led managers and boards to take actions that have had unintended, destructive consequences. When observing the behavior of management and corporate boards, when reading the management literature and the business press, and when assessing the outcomes of management behavior, it seems as though CEOs are recognized and rewarded handsomely for downsizing and outsourcing, acquiring or merging, and making the quarter — all justified by the responsibility to maximize shareholder value.
Any of these actions can be necessary in certain circumstances; most of us have taken one or another. My concern is that these actions have become the standard by which CEOs are expected to manage. Furthermore, these actions are taken seemingly without regard to the consequences for the community, the employees, the survival of the company as an institution, or the creation of long-term firm value.
New Guiding Beliefs
Shareholders benefit most when CEOs and boards maximize value for society and act as agents of society rather than shareholders.
The market favorably receives projects with long-term payoffs, particularly those in research and development.
The conventional course of action would have been to cut investments in research and restructure. Yes, those actions would have boosted short-term earnings. But they would have also undermined our efforts to create new drugs, which typically take 10 to 15 years to develop, hurting the company and the people who depend on us to find new therapies over the long term.
The fundamental challenges that CEOs of companies face are: innovate, manage risk and uncertainty, and create long-term firm value.
Purpose, meaning, and recognition are more powerful motivators than economic self-interest, and large external rewards can reduce intrinsic motivation. People do work for money but they work even more for meaning in their lives.
Actions to address societal issues should be an integral part of strategy, and operations and should not be isolated as a separate activity under the heading of corporate social responsibility.
The most successful CEOs, on balance, are those who are developed inside the company but manage to retain an outside perspective.
There are CEOs who subscribe to these beliefs but do not believe they can act on them because of their experiences with Wall Street or because they are counter to the beliefs of their boards. But these beliefs are not just ideals; they are implementable.
Source: The Harvard Business Review