Shareholders versus Stakeholders

by BILL WADDELL

The horrible shootings in Connecticut have set off another round of debates over the fundamental goals of a business - pitting financial gain against social responsibility.  The core principles of lean - including respect for all of the people working for the business, true partnerships with suppliers committed to the same view of their people, creating genuine value for customers, and so forth - are very much built around the idea that the two are not mutually exclusive:  The idea that the best way to make money for the stockholders is to take very good care of all of the stakeholders.  Lean proponents believe that fairly, even well, compensated employees; suppliers sure they will be dealt with fairly if they invest in the long term health of their customers; customers who receive the most for their money; and communities living with assurance that local employers are long term residents will all go beyond the call of duty to assure the success of the business.

 The alternative is the traditional economic view - that labor (the employees) and capital (the stockholders) are engaged in a zero sum battle with each other - that one's gain is the other's loss; that relationships with both suppliers and customers should be adversarial - again a sort of zero sum approach that a nickel negotiated away from a supplier or a customer is a nickel gained for the stockholder; that communities are sources of labor and infrastructure to be pitted against each other with the company to locate within the city limits of the lowest bidder for both.

The difference in views is very much a function of the time frame.  The holistic, lean approach is a proven winner, but is a long term winner.  Optimizing long term shareholder value often means sub-optimizing short term shareholder value.  In publicly traded companies the long term view just isn't in the cards.  The costs of dumping an investment in  one company and putting the money into another are just too low and the whole thing is structured to enable the trillions of dollars in the markets to lurch from one company to another in a continual quest for the best short term returns.

Lean literature is rife with advice on leadership, most of it assuming that lean is simply dependent on a CEO who gets it - and exhibits all of the qualities of some great historical leader.  Middle management people often complain long and loud about the leader they work for not 'getting it', or being unwilling to demonstrate such leadership.

The reality, however, is that the CEO, unless he is a sole proprietor (or at least the majority owner) has a boss just like that frustrated middle manager.  When that boss - the board of directors - hasn't bought into lean's long term, holistic philosophy, all of the high sounding leadership behavior in the world on the part of the CEO is unlikely to serve as the linchpin for lean success.  He or she is simply not going to get the necessary support for that short term shareholder sub-optimization needed to get to ong term shareholder optimization.

It is not a coincidence that Toyota conjured up much of the lean philosophy as a family owned business, dominated by a patriarch in a position to do whatever he wanted to in the short term, without fear of shareholder backlash.  It is not coincidental that Henry Ford bought out and booted out all of the other shareholders to clear the decks so he could double worker pay and halve prices the way he wanted to.

The ideal of mutually supportive goals between shareholders and stakeholders requires support from the top.  Lean success trickles down and cannot be driven from the shop floor, or even the middle.  The top means the top, however, and we can't simply put the onus on the CEO when he or she is not really at the top.  Certainly the CEO is uniquely positioned to educate and sell the board, but in the end, the real lean battleground is in the boardroom, rather than in the executive suite.

Original: http://www.idatix.com/manufacturing-leadership/shareholders-versus-stakeholders/

Comments

[don fitchett - Industrial Training]

Right on Bill, so many who strive for Lean in the USA, forget this. Thank you for reminding them.

[Steve Brenneman]

Im really glad I dont have to teach lean to a board to justify the right behavior! That would really suck!!!! Talk about a waste of precious energy needed for the hard work of transformation!

[Rob]

Bill,
This is, as are most of your articles, very thought provoking. As consumers and investors, perhaps it is up to us to support and invest in those companies that have fully embraced the lean philosophy. This could be the true power of capitalism. What publicly traded companies, from your perspective, best exhibit the qualities of lean philosophy. We hear about the old standards of Toyota and Motorola but I suspect there is a new generation out there.

[Robert Drescher]

Hi Bill

This is a point I have often brought up in Lean discussion and for that matter in any business improvement or development method you want to employee, the first and most important factor is long-term focused ownership. The biggest single problem facing all large and most large western businesses is the short-term focus of ownership.

This is one area our western governments could really help businesses out by shifting tax policies to encourage long-term stable investment practises, instead of our current system which promotes short-term thinking.