The markets and regulatory agencies governing publicly traded companies should borrow a page from the NFL’s playbook and purposefully manage the division between the real and expectations market, argues Roger Martin in his latest book Fixing the Game. In the (slowly) retreating shadows of the recent financial crisis, Martin rails against modern day American capitalism, arguing that CEOs need to address consumer needs instead of focusing on maximizing shareholder value.
Through the lens of agency theory, Martin discusses the pitfalls of tying managers’ incentives to the expectations market (stock market) instead of the real market (operations, cash flow, products and services, real customers). His running analogy compares the idea of shareholder value maximization to the way in which the NFL is proactively managed in order to ensure that the fans’ experience is maximized; for example, players and coaches are forbidden from gambling on football, which could influence their on-field performance, and salary caps ensure a more equitable distribution of capital, theoretically leveling the playing field for all teams. The analogy falls apart at times, but the general point rings true: companies should not be held hostage by their shareholders.
Martin’s criticisms of capitalism’s emphasis on the expectations market at times blur the lines between policy and management recommendations and a moral diatribe. He essentially argues that hedge funds have no societal value, where as venture capital and private equity firms play a prominent role in facilitating the creation of jobs and game-changing innovations.
Nevertheless, I agree with his central tenet that if businesses successfully address the needs of customers, shareholders will subsequently benefit; however, if the focus is exclusively on the shareholder, customers don’t benefit. Even former champion of shareholder maximization, Jack Welch, admitted that an expectations market-centric view of management is flawed: “On the face of it, shareholder value is the dumbest idea in the world,” he said in a 2009 Financial Times interview.
Focusing on the demands of external shareholders instead of meeting consumer needs stifles innovation and threatens long-term gains at the expense of short-term gains. Shareholders are not interested in well-designed products, services and customer experiences; instead, they analyze businesses through quantifiable financial metrics such as cash flow and profit margins.
Especially in today’s context of explosive startups and a wave of tech-driven IPOs, we must be cognizant of the fact that entrepreneurs are driven to build game-changing products and services above all else. The Mark Zuckerbergs of the world don’t need the fund manager of California’s pension system telling them how to run their business, after all.
Martin believes the shift of focus from shareholders to customers is inevitable, because, ironically, this way of thinking makes more money (as Steve Jobs proved at notoriously investor-averse Apple). Fixing the Game is a refreshing read, at least for all of its sports references, and hits upon themes that will no doubt take center stage in this year’s presidential election. Martin has my vote.
About Colin Hudson
Colin drives the business and analytical thinking on projects, working collaboratively as a consultant on the Motiv team.