Leader’s College

If you manage in an organization owned by someone other than yourself, to whom do you owe your loyalty and best efforts?

In the private sector the overwhelmingly popular answer, of course, is to the stockholders. “Maximize shareholder value” has become a ubiquitous managerial mantra and rallying cry sung in unison across all industries, reverberating throughout corporate corridors the world over. 

The ethos of serving the interests of a business’s stockholders has become so commonplace, it is veritably self-evident. Unless you’ve read the thinking of the late Sumantra Ghoshal of the London Business School. Consider his argument about appropriate corporate loyalty and see if you don’t reconsider your reflexive response.

The [prevailing economic] theory assumes that labor markets are perfectly efficient—in other words, the wages of every employee fully represent the value of his or her contributions to the company and, if they didn’t, the employee could immediately and costlessly move to another job.

With this assumption, the shareholders can be assumed as carrying the greater risk, thus making their contribution of capital more important than the contribution of human capital provided by managers and other employees and, therefore, it is their returns that must be maximized (Jensen & Meckling, 1976).

The truth is, of course, exactly the opposite. Most shareholders can sell their stocks far more easily than most employees can find another job. In every substantive sense, employees of a company carry more risks than do the shareholders.

Also, their contributions of knowledge, skills, and entrepreneurship are typically more important than the contributions of capital by shareholders, a pure commodity that is perhaps in excess supply (Quinn, 1992). As Grossman and Hart (1986) showed, once we admit incomplete contracts, residual rights of control are optimally held by the party whose investments matter more in terms of creating value. If these truths are acknowledged, there can be no basis for asserting the principle of shareholder value maximization. There just aren’t any supporting arguments.   [Source: Ghoshal, S. (2005). Bad management theories are destroying good management practices. Academy of Management Learning & Education, 4(1), p. 80.  Emphasis added.]

Then there’s all the research showing that how a company treats their employees eventually translates into customer behavior, loyalty, and profit.

When you’re assessing priorities and the proper allocation of your fidelity, you might think past the first mantra that springs to mind.