The Fourteenth Banker Blog

April 28, 2010

The Ownership Conundrum II

Filed under: Uncategorized — thefourteenthbanker @ 11:32 PM

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!

Good night.

14


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11 Comments »

  1. Wow!! Loved the store but I had no idea about their leadership.

    I wish I knew the email addresses of every financial executive in this country and email this to them so they could get off their lazy, excuses driven butts and do something about the dysfunction rampant in their industry.

    Comment by Vocalbanker — April 28, 2010 @ 11:54 PM | Reply

  2. Couldn’t agree more. My TBTF Bank treats their Clients and Customers like adversaries in a zero sum game to maximize bank profits by sucking as much out of their Clients as they can manage in every transaction. It’s clear from the inside (and out) that no dollar is to be left on the table.

    This has always seemed a strange method of ‘re-allocating scarce capital to profitable endeavors’ to me. Shouldn’t we be focused on making the pie bigger by supporting the organic growth of our Clients and Customers, and thereby our own? Undoubtedly. A rising tide floats all boats.

    My bank, on the other hand, will take your boat too, and happily float over you while the tide rises and you drown.

    Comment by lucyhoneychurch — April 29, 2010 @ 12:05 AM | Reply

  3. I’m not sure when “shareholder value” became the Holy Grail of investing, but it seems to me it wasn’t always thus. I’m 62, and I can recall when a company like Big Blue could pay a good wage, pay a dividend, had a defined benefit pension fund, paid taxes and still made a profit. And had loyal customers. They understood that they were not a stand-alone entity, but a part of society. We have lost sight of the idea of The Commons.
    I think part of the problem came from the advent of the IRA and (as Simon and James point out), the dawn of the discount brokerages, when average folks were encouraged to invest on their own. The rise of the mutual fund industry is part of the puzzle, too. Ironically, all the focus on “enabling us to become the ownership society”, telling us we would now be able to control our retirement investing more directly, was the opening salvo into the disappearance of the defined benefit pension fund. I don’t think it was coincidence.
    Since hindsight is 20/20, I now see that all this has led to the eroding of the Middle Class and a huge transfer of wealth from the bottom 2/3 to the top 1/3. Shareholder value as god meant cutting the bottom line as much as possible, which means cutting jobs, since they are the biggest expense. The jobs that replaced them, to the extent they WERE replaced, were lower paying, usually without benefits. I have never understood how business thinks we can survive as a nation, or that THEY can survive, when they have emaciated the American workforce to the point we are all living paycheck to paycheck. Who is going to buy the washing machines, the clothes, the cars, etc? We can’t all sell insurance or wait tables or say, “Welcome to Wal-Mart”.
    I just find the whole thing very short-sighted and ultimately ruinous for us as a people.

    Comment by Sandi — April 29, 2010 @ 8:37 AM | Reply

  4. Sandi, you know what else is ruinous? Is that we have taken the wisdom of 62 year olds such as yourself and shoved them in cubicle corners while the young and cutsie 35 somethings are touted as the bearers of the torch. And they’re torching us alright!!

    I urge you to keep coming back and sharing your wisdom, we BADLY need it!

    Comment by Vocalbanker — April 29, 2010 @ 9:27 AM | Reply

    • Thank you for your kind comments. I am learning much and enjoying the process.

      Comment by Sandi — April 29, 2010 @ 10:36 AM | Reply

  5. Here’s a different “ownership” question for you all. It is something that has rankled me for a long time. This oil spill is an object lesson in what I’m referring to –

    Fisheries, tourism on line
    Gulf region braces for economic fallout that could last years and potentially cost untold millions. (From http://www.marketwatch.com/)

    From climate change legislation to coal mine safety to safety equipment – you name it, we are told by industry that the costs are just too high – it would “cost consumers” too much. But there are costs – much like the toxic drek allowed to be taken off-balance sheet – that affect us all in various ways – from the cost of seafood going up (or being unfit to eat) to the cost of treating the increased asthma cases, and on and on. These are real costs to real Americans, but since they don’t (ok, can’t) appear on the corporate P&L, they are considered irrelevant.

    I realize no industry can accurately account for every externality, but to treat them all as if they don’t exist is no less dishonest.

    Comment by Sandi — April 29, 2010 @ 11:12 AM | Reply

  6. John Mackey thinks he’s using LOVE and happiness as an analogy to illustrate how his paradox of shareholder value formula works. In reality, LOVE and happiness are the heart and soul of his “practice”; they are using him as an analogy to show us the way forward.

    Never underestimate the power of LOVE in work and the power of working in/with LOVE.

    Comment by Susan Marie — April 29, 2010 @ 1:11 PM | Reply

    • I don’t trust him. Admittedly, I haven’t followed him lately, but awhile back I read a pretty scathing piece on him that didn’t inspire confidence. I got the feeling he’s milking the interest in organics purely for profit.
      Besides, the Whole Foods in Chapel Hill, NC, is a zoo! Not his fault, of course, but it’s worth your life to try to find a parking place, what with the honkin’ SUVs and Volvo station wagons racing each other for the first available slot. And the kids! Oy! The whining little crumb crushers are everywhere! Nothing in there was worth fighting that and the high prices, I don’t care if it’s all pure as the driven snow! LOL

      Comment by Sandi — April 29, 2010 @ 2:11 PM | Reply

      • If there is an integrity gap – a disconnect between what he says and does and the value system in place – it will be revealed.

        I also remember a recent flap or two. One on his motives and the other regarding a his position on insurance/health care reform. These events did not put him in positive light as both appeared to be “outbursts”.

        My guess is that he is an emotional guy, a rare quality in CEO’s these days. Let’s assume that the belifs and values (from the quote in the post above)are a true reflection of who he is. If so, his recent outbursts don’t align with what he says he values.

        Perhaps this is a kind of “ownership of values conundrum”. The challenge is in staying TRUE to your values no matter how difficult and challenging OR how successful and amazing your journey happens to be.

        Comment by Susan Marie — April 29, 2010 @ 2:54 PM

  7. It is quite accurate to view the current crisis in corporate America (financial and otherwise) in terms of an “ownership” conundrum. By “taking ownership” one assumes you are referring to taking responsibility, right? Most all corporate leaders and CEO’s (the good and bad ones) claim to be responsible owners, yet we have a massive integrity problem across the board!

    Why? Because successful “ownership” means taking responsibility for setting up a value system that supports your goals and initiatives. And then having the integrity to run the enterprise – in complete alignment with the very values you hold dear.

    Let’s also add that a value system is created/built in collaboration; customer input and team member insight are essential ingredients. The value system is perfected and enhanced, and even deconstructed and rebuilt by the same folks. They are the true shareholders.

    Comment by Susan Marie — April 29, 2010 @ 2:03 PM | Reply

  8. Excellent points, Susan Marie.

    I just came to the part of “13 Bankers” (pg 109-110), where they discuss the use of the ideal of home ownership both for and against us. On one hand, the idea of home ownership dovetails into the “strong, independent yeoman farmer/cowboy/frontiersman” that we all think we were, as well as the good old Puritan ethic of personal responsibility (taking better care of what is owned, due to having a personal stake, vs. renting, which was felt to disincline one from giving a hoot about garbage on the lawn). But it was turned against us when the quants learned to slice and dice and re-package even the most oderous offal and pawn it off as gilt-edged investments.
    When I first heard Mr. Bush mention the ownership society, I thought, “Yep, and we’re the ones who will end up being owned.”
    And Simon is right to say that what is said is only partially as important as what is HEARD. this is where the Devil is really in the details, because most people are conditioned to hear in sound bites. God forbid we should have to THINK – or as my dear friend likes to say, “Don’t confuse me with the facts, just dazzle me with the BS.”
    Cheers.

    Comment by Sandi — April 29, 2010 @ 2:21 PM | Reply


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