‘Taking the long view’, the Schumpeter column, Economist November 24th

As is common with Schumpeter, the anonymous author takes a hot topic and presents a balanced yet challenging analysis, showing that the proponents on both sides tend to simplify a complex issue.

The hot topic is the often slavish devotion to the concept of shareholder value.  The challenges started with no lesser person than Michael Porter of ‘five forces’ fame and has been picked up by a number of other leading figures since.  The article starts by quoting one of the most high profile and successful challengers to this 'cult of shareholder value', Paul Polman, CEO of Unilever.  There is reference to Polman's speech at the World Economic Forum at Davos when he told the audience that 'Hedge Fund Managers would sell their grandmothers for a profit'.  More meaningful have been his actions in stopping the publication of quarterly results and earnings forecasts.  He has also strengthened Unilever's reputation for long term thinking by his commitment to sustainability.

Polman was one of a number of contributors to the recent annual Peter Drucker Forum in Vienna.  Other speakers went for even stronger hyperbole; one called it 'a crummy principle that is undermining capitalism', another urged for its complete abandonment.  Drucker himself is quoted as criticising actions to manipulate earnings by pointing out that 'long term results cannot be achieved by piling short term results on short term results'.

The author is very skilful in the way that he accepts these views and even reinforces them with further evidence, showing how shareholders, on average, now hold on to investments for months rather than years, and how public companies, faced with these pressures, invest for the future much less than their private equivalents.

Having lured us into a cosy acceptance of the Drucker Forum view, Schumpeter then presents the other perspective by asking the legitimate question - what are the alternatives?  He (or maybe she?) also presents examples of companies who are committed to shareholder value and yet perform very well, both short and long term.  He also points out that sometimes short term pressures can work in the long term interest, for instance by persuading companies to sack underperforming executives.

The article quickly runs through the alternatives - multiple stakeholders, customer satisfaction, management assessment - and points out that these approaches are even more flawed.  He also quotes companies like Amazon and IBM who have taken a long term approach and carried shareholders with them, because their strategy and communications were strong.

The correct conclusion comes at the end of the article; it is not ‘either/or’.  CEOs can be selective about which parts of the shareholder value concept they buy into and can adopt strategies which emphasise the long term.  Warren Buffett refuses to provide earnings guidance but does not reject the whole package.  IBM provides such guidance but extends it to several years out.  L'Oreal awards bonuses for longer term shareholders.

This is an article that has a lot to commend it - short, punchy, balanced and well-reasoned.  If only the more specialist magazines published articles on management topics in similar style!

Read the original article;
http://www.economist.com/news/business/21567062-pursuit-shareholder-value-attracting-criticismnot-all-it-foolish-taking-long