I read a post on LinkedIn last week discussing shareholder value & the Scandinavian way of doing business – it suggested the Scandinavian way of doing business could be an inspiration to create “shared value” as opposed to shareholder value. There was also an article in the Economist the week before – suggesting there is no alternative to shareholder value as the best objective of businesses.
This is an interesting debate & I felt obliged to put my 2 pence in. Firstly, I think it is necessary to be clear about what we mean by Shareholder Value – Investopedia defines it as “the sum of all strategic decisions that affect the firm’s ability to efficiently increase the amount of free cash flow over time”. To me the important aspect of the definition is “over time”, it doesn’t say, currently or anything about current price of shares.
I agree that shareholder value is the objective that businesses should focus on. However, I believe that too many organisations have lost sight of the fact that the other stakeholders (employees, customers, suppliers, communities, etc.) influence that value OVER TIME.
One of the fundamental principles in Lean is Respect for People or it should be for those who haven’t heard that before or those using an alternative definition of Lean. It is about working with the various stakeholders of an organisation to increase the value of the firm OVER TIME. It is not about a quick revamp of operations and ripping out anything that can be removed in an effort to save money.
The customer is always at the forefront of the mind in Lean organisations, as the customer defines value, in terms of the output of the organisation.
Lean is about developing the people within the organisation to continuously focus on making improvements to the organisation with the outcome being greater efficiency & effectiveness and hence, higher output (capacity) for the same inputs. Thus growth is (in principle, not always in practice) a fundamental concept within Lean.
Lean organisations should also get to a stage in their journey where they begin working with their suppliers to improve their (the supplier’s) organisation and then share the benefits.
In simplest terms, Lean organisations are focusing on the long-term development of the organisation through the development of the people within and around the organisation. If this view is taken, then it is easy to say we should focus on shareholder value, because we know that while there will be conflicts, shareholder value can only be created OVER TIME when we consider the impact & influence of the various stakeholders.
Toyota – the company that Lean was modelled from, has 14 principles that guide their thinking. It’s no wonder they have been so successful at creating shareholder value when their first principle reads: “Base your management decisions on a long-term philosophy, even at the expense of short-term financial goals.”