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Other Articles from The Villager

Role of CEO - Fixing the problem


by Mr. T
Columns

Legally and practically, the CEO's primary obligation is and should continue to be to the shareholders.
Though some will argue that this approach is inconsistent with overall societal benefit, I believe that the shareholder-centric ethos has served as an effective vehicle for streaming the diverse interests of collective capital towards a singular productive purpose.
This unified pursuit has provided growth and jobs. We must be careful not to abandon it, but we must recognize that the term "shareholder value" means long-term shareholder value.
Societal benefit and long-term shareholder value are completely consistent. The long-term success of a corporation is dependent on both the societal consent of its activities and its ability to provide consumers with the products and services they want and desire. If a business is not mindful of and attentive to these concerns, it will lose customers, suppliers, employees, and ultimately profitability. The CEO, who neglects or unfairly treats these important constituencies, will suffer the financial consequences.
But to act in a manner overly protective of any one of these interests to the neglect of ultimate shareholder value is equally problematic. When capital is treated poorly, it is apt to move elsewhere. Over our history, a focus on long-term interest of shareholders has created the proper incentive and accountability structure that led to corporate health and success. To operate successfully and create shareholder value, a business must deliver societal value; conversely, this creation of shareholder value is necessary for the corporate success that leads to societal gain.
The problem today with the shareholder primacy model is not the model itself but how it is being interpreted. The proper emphasis is not shareholder value at any price but long-term shareholder value. As demonstrated recently, if businesses are operated for short-term profit, all of us will lose. The service-oriented retailer that cuts labour costs in its stores, sacrificing customer service, may improve quarterly profitability but consequently will lose its customer-base which will eventually destroy its business. A CEO must make decisions for the long-term interest of the business - ultimately, the business will prosper and so will the shareholders and coincidentally, the other constituencies.
So what can be done to encourage this? The solution is straightforward.
With each major decision, the directors must simply ask the question, "Does this create long-term shareholder value?" If the CEO cannot explain how it will so as to act to the board's satisfaction, then the decision should be scuttled. The question must become dogmatic mantra in boardrooms. It forces reflection and accountability. If asked consistently and firmly enough, it will eventually change thinking and managerial behaviour.
Sometimes rote tradition can add great value. In my own boardroom experience, simple questions, persistently asked, change attitudes. This wholly appropriate question should become a standard part of the board's review process. I think that, ultimately, this will help us return to the correct shareholder value approach to the benefit of our society.