Now that we have a little pause in the circus, I want to return to an issue introduced a few days ago. I used the events of the day to introduce the idea that the ownership of an institution is important. If the market bids up and rewards behavior that is anti society, then it will very hard to stop that behavior, new regulations or not. Even today Dick Bove was putting a $200 price tag on Goldman and saying to buy it. Each of us has to decide if we are willing to overlook the behavior and make the investments in these firms in hopes of realizing profits. It is not an easy issue. Most of us do not have periscopes into these organizations which give us enough certainty about their ethical practices to make a decision to deliberately forgo potential profit. While we cannot easily judge the ethics of most companies, we can have more success determining whether the organization’s values align with ours. If their values align with ours, there is a pretty good chance we can have the return on investment we need and feel good about who we own. Let’s turn to John Mackey of Whole Foods and look at his comments on the paradox of shareholder value. I agree wholeheartedly with these comments and believe they represent the best of what banking was, and could be again.
… There is a fundamental paradox that I call the “paradox of shareholder value”. The best way to maximize shareholder value is to not make maximizing shareholder value the primary purpose of the business. Why not? Because it is the business that satisfies customers best that has the most customers, the highest sales, and the most profits. The best way to satisfy customers best is to organize the entire business around satisfying the customer. Every communication the business makes towards its customers, its employees, and the media should be about putting the customer first. Ultimately the best way to satisfy customers’ needs best is to actually put those needs first. If profit is the articulated primary goal of the business then it is unlikely that the employees or management of the business will dedicate themselves to customer satisfaction to the same degree they would if customer happiness was seen as more important than investor profits. In the first case customer happiness is merely a means to an end — maximizing profits. In the customer-centered business, however, customer happiness is an end in itself and because it is it will be pursued with greater interest, passion, attention and empathy than the profit centered business is capable of.
Let me give you an analogy that may make this point better: What is the key to happy marriage? Is my wife’s happiness an end in itself for me or is her happiness merely a means to a different end — my own personal happiness? It has been my experience that I am happiest in my marriage when my love for my wife causes me to place her needs and desires first — ahead of my own. When my wife is happy then I am happy. When she isn’t happy, then I’m not happy. I achieve my personal happiness in marriage best by not focusing directly on it, but by focusing on her happiness as the primary goal for me in the marriage. That is the way love works, in my opinion. The beloved’s happiness is an end in itself — not a means to some other end. Paradoxically by seeking to maximize my wife’s happiness, I also maximize my own. However, that is a secondary by-product of my desire for her personal happiness. Fortunately for me my wife shares my philosophy of marriage and reciprocates my dedication to her happiness with an equal dedication to my own happiness as well.
Similarly to a happy marriage, the most successful businesses put the customer first — ahead of the shareholders. They really have to have this dedication to the customer to maximize customer happiness. Customers aren’t stupid. They know when they are being misled or merely being used. It is also difficult to impossible to truly inspire the creators of customer happiness, the employees, with the ethic of profit maximization. Maximizing profits may excite shareholders, but I assure you most employees don’t get very excited about it even if they accept the validity of the goal. It is my business experience that employees can get very excited and inspired by a business that has an important business purpose (such as selling the highest quality natural and organic foods) and teaches them to put the needs of the customers first. People enjoy serving others and helping them to be happy — when they know this is their primary goal and are also rewarded for successfully doing so.
The customer-centered business is usually the most successful and the most profitable, while the shareholder centered business usually underperforms over the long-term. I suggest reading Jim Collins’ two books Built to Last and Good to Great for empirical evidence to this viewpoint. The ultimate test of these two business theories, however, is in the marketplace — not in theoretical arguments. My company, Whole Foods Market, is a mission-driven business that puts the customer first, the team members second, and the shareholders third. We are winning competitive battle after competitive battle in the marketplace against businesses which adhere to the philosophy of maximizing profits and shareholder value as their primary goal. Whole Foods has never had a store we open ever fail in the marketplace. We have never lost a competitive battle in 27 years of business! Why not? Because the profit-centered businesses we compete against cannot beat us in the marketplace. Our customer and team member-centered business model beats them every single time.
Do you think your TBTF bank is so customer and team member centered that it has a right to demand that the Congress protect its stature?
There are more aspects of the ownership conundrum to talk about in future posts.
By the way, while my suggestion to sell bank stocks was on principle, it is interesting that the stocks have dropped sharply. It is certainly not because of a suggestion or a couple of you selling shares, but perhaps because the universe will “mean revert” to a system that has values. Wouldn’t that be cool!