Strategically Minded

Month: January, 2012

Maximising Shareholder Return is Not Enough

This article are my thoughts regarding Steve Denning’s excellent review and commentary of Roger Martins new book “Fixing the Game“.

To give you some background:

  • In 1976 Jensen and Meckling wrote an article that suggested a solution to the Principle-Agent problem. Their solution was based on the premise that the singular goal for a firm is to maximise shareholder value. Denning describes their article as being academic in nature, in that they create a problem to which they then propose a solution, rather than it being based on any real-world scenario.
  • In 1973 Peter Drucker, quite contrary to the position taken by Jensen and Meckling, believes that the singular role of business is “to create a customer”.

I do not believe that maximising shareholder return is the sole purpose of a corporation. If we start by looking at any company of repute, than we see that they all have certain characteristics in common, they proudly promote their vision, mission and values. The visions and mission of each company varies widely but most follow a common theme, that they all wish to contribute to their stakeholders and society, while making a profit. Profit is for them is necessary for sustainability, however is only a means to a much greater end. Corporate social responsibility pioneers would also tell us to look at the triple bottom line, or People, Planet and Profits, with profits being in this case a tertiary concern.

However, why is the case? Why should we look after the shareholders interests only? Friedman’s views states that as corporation are not natural persons, their right is only to stay within the law, and unlike natural people they do not have social responsibilities. It carries on to say that a company should not use its profits for social needs, rather social decisions should come from the shareholders, and in a case of multiple shareholders the firm should distribute profits in the form of dividends and the shareholders themselves can independently decide how to utilise their earnings.  Is this argument good enough?


Towards a Healthy Hierarchy

This article is a summary of “Towards a Healthy Hierarchy” in The Boundryless Organisation by Ashkenas and Ulrich, 2002.

While resources are limited and perspective between employees differ, there will always be a need for leaders who make decisions for other. This article looks at how hierarchies can function effectively within a boundaryless world. Hierarchies have been a mainstay not just for the industrial sector, but also for the military sector, religious instituitions and governments. However, the main body of this text is focused on how firms can more effectively manage their hierarchy to be able to meet the success requirements of the new paradigm within the 21st century.

Old hierarchies are based around success factors such as size, role clarity, specialisation and control. These factors are not going to provide 21st century firms with the competitive advantage they need to success; rather organisations need to be based around the need for speed, flexibility, innovation and integration.

How to Spot Unhealthy Hierarchies

  • Slow response time – when an organisation takes too long to make decisions, respond to customer requests, or react to changes in market conditions.
  • Rigidity towards change – when organisations insist “we’ve always done it this way”.
  • Underground activity – when creativity and innovation is driven underground.
  • Internal frustration – employees and managers harbour feeling of dissatisfaction with the organisation, the way it works, and the way it treats them.
  • Customer alienation – customer feel frustrated and angry when they do not receive adequate treatment.

Acting on the Warning Signs

To fight against hierarchical decline, leaders must find the right balance of freedom and control. There are 4 levers which leaders can use to make the switch towards a healthier hierarchy.

  1. Information moves from closely held or integrated at the top to open sharing throughout the organisation. Shared information helps all employees gain a common sense of purpose and an understanding of organisational goals.
  2. Competence moves from leadership skills exercised at senior levels and technical skills exercised at lower levels to competencies distributed throughout the organisation. A Jazz band is an example of a boundryless organisation as musicians individually internalise the feelings and mood of the music and then harmonise their instruments with the other band members.
  3. Authority moves from decisions concentrated at the top to decisions made all along the line, at whatever points are appropriate. boundryless organisations leave decisions to the person closest to the issue.
  4. Rewards move from position based to accomplishment based. In a boundryless organisation, rewards have two objectives: to recognise past performance and to stimulate competent performance in the future.

The Myths about Creating Healthy Hierarchies

  1. Delayering creates healthy hierarchies.
  2. Training creates healthy hierarchies.
  3. Shared decision making creates healthy hierarchies.
  4. Sharing information creates healthy hierarchies.
  5. Broad sharing of rewards creates healthy hierarchies.
  6. All employees want to be empowered in a healthy hierarchy.
  7. Middle managers resist healthy hierarchies because they will lose power.