A New Way to Think - Roger Martin

Partial Excerpts (antilibrary)

2. Stakeholders: To actually create shareholder value, put customers before shareholders.*

Modern capitalism can be broken down into two major eras. The first, managerial capitalism, began in 1932 and was defined by the then-radical notion that firms ought to have professional management. The second, shareholder value capitalism, began in 1976. Its governing premise is that the purpose of every corporation should be to maximize shareholder wealth.

Both eras were heralded by an influential academic work. In 1932, Adolf A. Berle and Gardiner C. Means published their legendary treatise, The Modern Corporation and Private Property, which asserted that management should be divorced from ownership

Then in 1976 managerial capitalism received a stinging rebuke: Michael Jensen and William H. Meckling’s “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” published in the Journal of Financial Economics. The paper, which has gone on to become the most-cited academic business article of all time, argued that owners were getting short shrift from professional managers, who enhanced their own financial well-being rather than that of the shareholders.

But have shareholders become significantly better off since they displaced managers as the center of the business universe? Not really. From 1933 to the end of 1976, when they were allegedly playing second fiddle to professional managers, S&P 500 shareholders earned compound annual real returns of 7.6 percent. From 1977 to 2020, they’ve been an eerily similar 7.8 percent

That finding begs a more provocative follow-up: If the shareholders were all you cared about, would focusing on increasing shareholder value necessarily be the best way to make sure they benefited?

To actually create shareholder value, put your customers before your shareholders. In other words—and nobody should be surprised by this—Peter Drucker had it right when he said that the primary purpose of a business is to acquire and keep customers. (create a customer)