It’s Customers, not shareholders who create long term value for a corporation.
CFO & COO (International), ICMA Australia
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!” Upton Sinclair
A spate of recent corporate scandals indicate that corporations are increasingly sacrificing customer wellbeing and satisfaction in the myopic pursuit of market share and short-term shareholder value creation. This malaise of Corporate Myopia seems to have become an epidemic in the 21st century and it can reasonably be argued that the Global Financial Crisis was a result of this affliction. Short term greed has driven this climate of Corporate Myopia which has seen the drivers of long-term value creation namely people, processes and customers sacrificed at the altar of short-term profitability.
Corporate Fiascos of the 21st Century
Johnson & Johnson
Johnson & Johnson, the reputed pharmaceutical giant, today stands accused of misleading doctors and patients about the dangers of prescription medicines used to treat severe pain – opioids. Oklahoma’s bellwether trial over the opioid crisis began Tuesday (May 28, 2019) with officials accusing pharmaceutical giant Johnson & Johnson of acting as a “drug kingpin” that killed over 4,600 Oklahomans through unintentional overdoses and created a public nuisance that cost the state billions of dollars. On 28th of May Mike Hunter, the attorney General of the state of the state of Oklahoma described in graphic detail the horrific plight of the addicts including small babies saying, “How did this happen? I have a short, one-word answer: greed.”[1]
It is the first of 2,000 cases brought by state, local and tribal governments against pharmaceutical firms in the US. Johnson & Johnson denies wrongdoing and says it marketed products responsibly. But one has to ask how did it come to this? How is it that a company which in 1982 spent over $100 million dollars recalling Tylenol to protect its customers, today stands accused of callously disregarding its customers in the pursuit of ‘greed’? The company won universal accolades for its action in 1982 but nearly four decades later today stands accused of such horrific neglect. We should wait for the verdict of the courts to decide their culpability but we ask the question, is this another result of the malaise of corporate myopia afflicting the business world in the 21st century?
Boeing
On 10th March 2019, an Ethiopian Airlines aircraft 737 Max crashed killing all 157 people on board. Coming close on the heels of the Lion Air crash of the same aircraft 777 Max in October 2018, this brought the total death toll to 346. Within 3 days all countries except the USA and Canada had grounded the aircraft and a few days later (17th March, 2019) the USA and Canada also followed suit.
“The events that led to these two fatal crashes were set in motion nearly a decade ago, and they started not with Boeing, but with the company’s European archrival, Airbus……. On Dec 1st, 2010, Airbus stunned the aviation community. In secret, it had developed a more efficient version of the A320 called the A320neo (which stands for “new engine option”). It would burn about 6 percent less fuel than the 737NG…… In the face of the existential threat from the A320neo, Boeing’s execs made up their minds in a matter of weeks. The company would launch a fourth-generation 737, and it would do it in record time……. To beat Airbus, it would have to break the one unbreakable law of project management: that a development cycle can’t be fast, cheap, and good. If it failed, Airbus could corner a $35 billion market for single-aisle airplanes for a decade or longer. So, Boeing could not afford to fail.”[2]
Boeing was established in 1916. It took 102 years for it to become a US$100 billion company (US$ 101.13) in 2018 which was 8% higher than 2017’s US$94.01 billion. Having taken over a century to become a $100 billion company at the beginning of this year it aimed to double its revenue to $200 billion in the next 7 years. In other words, in the next 7 years it aimed to achieve growth equal to what it previously took a century to achieve. The question we have to ask is that in its hunger for growth did it risk too much? By focusing on beating Airbus in the short to medium term has it not done irreparable damage to its reputation in the long run?
The Australian Banking, Superannuation and Financial Services Sector
Evidence of how wide spread is greed and pursuit of short-term profits in the corporate world was found in abundance by the ‘Royal Commission into misconduct in the Banking Superannuation and Financial Services Industry’, which submitted its final report in February 2019. It found that “Banks, and all financial services entities recognised that they sold services and products. Selling became their focus of attention. Too often it became the sole focus of attention. Products and services multiplied. Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales……. Why did it happen? Too often, the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained?” [3]
The report exposes the rort that deeply afflicted the very large Financial services sector in Australia in general, and the big four banks in particular. And as quoted above it unequivocally blames ‘greed and the pursuit of short term profit’ for the wide spread misconduct – in other words it blames the toxic culture of ‘Corporate Myopia’ in which reputed institutions put short term profitability ahead of the main value driver for its business namely the ‘Customer’.
European Motor Industry Emissions Scandal
Volkswagen convicted of fraud but BMW and Daimler (Mercedes Benz) now charged with collusion.
European corporations are not immune from Corporate Myopia. The case of Volkswagen and its criminal culpability in the emissions or the ‘Diselgate’ scandal is well documented and confirmed. “A federal grand jury in Detroit has indicted four former Audi managers for their alleged role in the German automaker’s scheme to cheat US emissions testing on diesel-powered cars, according to a new court document published Thursday. Audi’s malfeasance was part of a larger effort from parent company Volkswagen Group to sell millions of cars with engines that were dirtier than regulations allowed, a scandal that was uncovered in 2015 and has since been dubbed “Dieselgate.” …… The total number of people who have been charged in the US over alleged involvement in ‘Dieselgate’ is now thirteen. Volkswagen Group pled guilty in US court in 2017, and has agreed to pay back more than $20 billion to states, dealers, regulators, and individual owners. Multiple former executives are in prison, and Volkswagen’s CEO at the time — Martin Winterkorn — swiftly resigned when the news broke in 2015.[4]
Providing further evidence of how Corporate Myopia has spread deep into the Europe on 5th April, 2019, the European Commission found that three German Auto Giants BMW, Daimler (the parent company of Mercedes Benz) and Volkswagen colluded to restrict the technology to clean emissions from passenger cars.
EU Commissioner Margrethe Vestager, who is in charge of competition policy, said EU antitrust authorities were concerned that VW, BMW and Daimler deliberately restricted their customer’s access to the best technology. “Companies can cooperate in many ways to improve the quality of their products. However, EU competition rules do not allow them to collude on exactly the opposite: not to improve their products, not to compete on quality,” Vestager said in a statement.[5]
No prizes for guessing why these reputed corporations acted not just unethically but also immorally and illegally – its short-term profitability, stupid…. Corporate Myopia in the 21st Century.
United Airlines
This incident is a couple of years old but is a powerful example of how Corporates are so focused on their profitability that they end up mistreating the customer forgetting that it is the Customer that enables them to make profit.
On April 9, 2017 Dr. David Dao a Vietnamese American Doctor was dragged off a United Airlines flight at Chicago International Airport. The flight was fully booked and all passengers had boarded when an airline supervisor walked onto the plane and brusquely announced: “We have United employees that need to fly to Louisville tonight. … This flight’s not leaving until four people get off.” Passengers were initially offered $400 to get off the flight and this offer was increased to $800 but no one was ready to leave the flight. United Airlines then ‘randomly’ selected four passengers to leave the flight. It was later found that the so-called random selection was out of the lowest fee paying non frequent flyers. Three of the four passengers grudgingly left the aircraft but Dr David Dao refused to leave because he had patients to see on the next day. He was dragged of the flight and incurred significant injuries but the videos of him being dragged out went viral and created a furore. The CEO of United Airlines initially backed his employees saying that they were only following procedures (saying that the passenger was belligerent). It was only next day when the public outrage became furious and ferocious that he offered an unqualified apology. United Airlines and Dr Dao reached a confidential settlement.
In their quest to ensure profitability all Airlines overbook – that by itself is not a major issue because the overbooking results in a very miniscule number of circumstances where booked passengers are denied a seat. The issue is how an airline ensures that the off-loaded customer is treated with dignity and adequately compensated. United Airlines in this case learnt from its mistake and subsequent to the incident raised the amount that can be compensated up to $10,000.
Conclusions you can draw from these Fiascos
Too many corporations today suffer from Corporate Myopia – looking for short term profits. There is too much focus on shareholder value and much of it is short term because these days no one seems to have the vision for the long run. Specially not shareholders – “The average time someone used to hold a share of stock back in the ’1960s was eight years. Now, the average time is four months,” – U.S. Sen. Mark Warner. Fact checking this assertion has proved that this claim is substantially correct.[6] Consequently this short-term myopia malaise seems to have infected the management of corporations as well.
A study published by Harvard University shows that the median tenure of CEO’s has been falling – it has fallen by 1 year from 2013 (7 years) to 2017 (6 years).[7]
Should companies be focused on Shareholder Value?
Jack Welch, the former General Electric chief who as per the Financial Times is regarded as the father of the “shareholder value” movement that has dominated the corporate world for more than 20 years seems to have taken a U turn on the subject. He told the Financial Times in a 2009 interview that the emphasis that executives and investors had put on shareholder value, which began gaining popularity after a speech he made in 1981, was misplaced. “It is a dumb idea,” he said. “The idea that shareholder value is a strategy is insane. It is the product of your combined efforts – from the management to the employees”. “On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy . . . your main constituencies are your employees, your customers and your products.”
The truth might have dawned on Jack Welch a little late, but Peter Drucker had already in the 1970’s published this definition of business in his book, Management: Tasks, Responsibilities, Practices. … “It is the customer who determines what a business is…The customer is the foundation of a business and keeps it in existence. He alone gives employment.” There is only one valid definition of business purpose Dr Drucker emphasised – To create and keep a customer.
Drucker was in fact emphasising a truth which has been valid for business organisations ever since business began. The truth being that the achievement of shareholder or business value should not be the objective or focus of business rather it should be one of the methods of measuring the success of a corporation in achieving its objectives which should all be centred on the customer.
And how is customer satisfaction achieved – primarily by getting the processes that drive it right! And how does a corporation get the all-important processes right – by making sure it has the right people in the right places to drive the processes. So, it is not profit or market share, stupid – rather focus on your customer and get the right processes and people in place to satisfy the customer – the profits and market share will surely follow. An inspiring urban legend of customer focus leading to improve processes and products is that of the late Sumant Moolgaokar who was CEO of the Tata Engineering and Locomotive Company (TELCO), who would forgo his plush five star office executive lunch to have lunch at small roadside restaurants (dhaba) frequented by truck drivers so that he could discuss the working of TATA trucks with the end users of the vehicle. He used the meticulous notes he took from these ‘customer and product focused’ meetings to improve on the vehicles that TATA produced. A great example of Customer Focus leading to process and product success. This customer focus is probably what has helped TATA to achieve considerable success in the automobile industry. It can be noted that in 2008 TATA acquired the iconic British company Jaguar from Ford and turned its fortunes around.
What are the Critical Success Factors enabling value creation for corporations in the long term? Maybe the CEO’s of the 21st century can learn something from their counterparts in the 15th Century. In ‘Relevance Lost – The Rise and Fall of Management Accounting’, Johnson and Kaplan take us back to trade on the silk Route in the 15th century when traders used camel trains (caravans) to transport goods between Italy and China. What would be the critical success factors that CEO’s of businesses that operated along the silk route focus on? When the camel Caravan was traversing the Persian desert en route to India would they be focused on computing the expeditions profit for the third quarter of 1487? Johnson and Kaplan argue that there were “many measures of the caravan’s performance during the third quarter of 1487 that the investors would have been interested in knowing. For example, what distance did the Caravan cover and in what direction? How many provisions were left? What was the condition of the inventory being transported? Were the workers content or rebellious?
There were many potentially useful indicators of the caravan managers performance during the third quarter, 1947. BUT QUARTERLY PROFIT WAS NOT ONE OF THEM.”[8]
“Because even 500 years ago investors likely understood that allocating profits of expeditions to periods as short as three months was not a meaningful exercise.”
Johnson and Kaplan are critical of the short-term focus (quarterly earnings) of today’s organization comparing it to the equivalent of the investors in the 15th century focusing on profit allocation in the middle of the Caravan’s progress. Focus instead on getting the critical success factors right – profits will follow.
So, this brings us back to the original question and the topic of this article – Are myopic corporations pursuing short term profits – ignoring Customer, Employees and Processes which are the drivers of long-term profitability?
Prima facie it has to be said that there is nothing wrong in pursuing profits or having an objective as increasing shareholder value both in the short and long term. However, this cannot be to the detriment of the drivers of that value namely processes, customers and employees. Increasing Shareholder Value should only be part of a hierarchy of objectives which include increasing value to the customer by improving its processes and employing/retaining the best talent. Ignoring these drivers of value is Corporate Myopia; and unfortunately, evidence suggests that it is a growing modern-day malaise of the 21st Century.
[1] https://www.courthousenews.com/oklahoma-takes-on-drugmaker-in-first-major-opioid-trial/
[2] https://www.theverge.com/2019/5/2/18518176/boeing-737-max-crash-problems-human-error-mcas-faa
[3] https://financialservices.royalcommission.gov.au/Pages/reports.aspx
[4] https://www.theverge.com/2019/1/17/18187558/audi-charges-dieselgate-scandal-indictment-cheating
[5] https://www.dw.com/en/european-commission-finds-german-automakers-illegally-colluded-on-emissions-technology/a-48218578
[6] https://www.politifact.com/virginia/statements/2016/jul/06/mark-warner/mark-warner-says-average-holding-time-stocks-has-f/
[7] https://corpgov.law.harvard.edu/2018/02/12/ceo-tenure-rates/
[8] Kaplan, Robert S., and H. Thomas Johnson. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press, 1987.
