By James M. McTaggart, Chairman & Chief Executive Officer and Peter W. Kontes, President & Chief Operating Officer

  

Virtually all CEOs and directors of publicly traded companies, especially in the United States, acknowledge that creating value for shareholders is an important corporate objective. Typically, however, shareholders are considered to be only one of a number of important constituencies or "stakeholders" vying for a preference in management’s evaluation of key decisions. These stakeholders are usually specified to also include customers, employees, suppliers (including creditors), and the wider community.

These competing claims for preference in the allocation of the company’s resources have given rise to distinctly different points of view about what the corporation’s governing objective should be. Some, like ourselves, believe that the best managed companies are those that consistently resolve trade-offs in ways that create the maximum possible value for shareholders. An especially vivid statement of this point of view was expressed over 30 years ago by the CEO of a textile company called Indian Head Mills:

"The objective of our company is to increase the intrinsic value of our common stock. We are not in business to grow bigger for the sake of size, nor to become more diversified, nor to make the most or best of anything, nor to provide jobs, have the most modern plants, the happiest customers, lead in new product development, or to achieve any other status which has no relation to the economic use of capital. Any or all of these may be, from time to time, a means to our objective, but means and ends must never be confused. We are in business solely to improve the inherent value of the common stockholders’ equity in the company."¹

In a second camp are those who believe that the interests of a stakeholder group other than the shareholders should be consistently favored by management. Socialists, for instance, believe the interests of society and employees should supersede the interests of customers and shareholders (the state, in most cases). Given the unbroken string of failures foisted on the taxpayer by state-run companies, however, we see no reason to describe the well known flaws in this argument. Perhaps more relevant to the readers of Commentary is the view, rapidly becoming the conventional wisdom, that maximizing customer satisfaction should be the corporation’s governing objective. Occasionally, the most vocal advocates of making customer satisfaction the governing objective can be quite hostile to any consideration of shareholders’ interests. For example, a business school professor recently wrote the following:

"Many managers in the United States still operate under the twin fictions that their most important stakeholders are shareholders, and that their primary purpose in management is to enhance shareholder value. Whether this is true from a legal perspective in the case of publicly traded firms is worthy of debate; but from a strategic and operational perspective, it is dead wrong for any firm — publicly traded or privately held. A business does not exist for the benefit of investors, nor should it be run under that premise."² The author went on to say that the primary objective of the company should be to service the needs of its customers, not its shareholders.

While some may be sympathetic to this view, most executives who advocate customer satisfaction as the primary objective at least acknowledge the need to provide benefits to other stakeholder groups. A typical expression of this philosophy comes from Paul Allaire, CEO of Xerox, who said, "I have to change the company substantially to be more market driven. If we do what’s right for the customer, our market share and our return on assets will take care of themselves."³

Finally, there is a third group that gives priority to somehow finding the right balance among stakeholder interests. One of the strongest advocates in this camp, until it was acquired by A.T. & T. in 1991, was NCR Corporation. In its last annual report, it described itself as follows:

"NCR is a successful, growing company dedicated to achieving superior results by assuring that its actions are aligned with stakeholder expectations. Stakeholders are all constituencies with a stake in the fortunes of the company. NCR’s primary mission is to create value for our stakeholders."⁴

A recent survey of directors suggests that NCR was not alone in its views. The survey results led the authors to conclude that "… boards of directors no longer believe that the shareholder is the only constituent to whom they are responsible". They state further that "… this study reveals that these perceived stakeholders are, in the order of their importance, customers and government, stockholders, employees, and society."⁵

In this Commentary we want to deal with two related questions. First, should the company’s governing objective be to maximize the economic benefits to any group other than the shareholders? Second, is balancing competing stakeholder interests an appropriate governing objective for a large corporation?