The Harvard Business Review hosts an excellent Online Forum titled The CEO’s Role in Fixing the System.
A recent post by Raymond V. Gilmartin caught my attention. Gilmartin is the former chairman, president, and CEO of Merck and is currently an adjunct professor at Harvard Business School.
Despite the fact that Gilmartin, resigned abruptly in 2005 over how the company handled safety concerns surrounding Vioxx, Merck had previously been considered one of the most ethical – and profitable – companies in the country. His insights are worthy of consideration.
Gilmartin begins by writing that:
“In the past 25 years, CEOs of many major corporations have relied on a flawed set of beliefs to lead their organizations. This set has influenced them to place way too much emphasis on maximizing shareholder value and not enough on generating value for society. Today, we are mired in the Great Recession, which was brought about by the near collapse of the financial system. This environment and the behavior produced by the prevailing set of beliefs to which CEOs subscribe have deepened a widespread public distrust of corporations and capitalism.”
Gilmartin proposes five new guiding beliefs.
These beliefs are right on the money and provide excellent direction for leaders, entrepreneurs and managers at all levels.
- Shareholders benefit most when CEOs and boards maximize value for society and act as agents of society rather than shareholders. This concept is otherwise known as stakeholder capitalism or economic democracy.
- The market favorably receives projects with long-term payoffs, particularly those in research and development. As I have often stated, our preoccupation with short-term results has permanently damaged our competitiveness let alone the environment and our future.
- Purpose, meaning, and recognition are more powerful motivators than economic self-interest, and large external rewards can reduce intrinsic motivation. As endless studies on happiness have revealed, beyond a relatively low threshold, money simply can’t buy happiness, doesn’t motivate the most talented people and business success now requires a much more sophisticated strategies to engage and motivate employees.
- Actions to address societal issues should be an integral part of strategy, and operations and should not be isolated as a separate activity under the heading of corporate social responsibility. Yes, we already know that’s true.
- The most successful CEOs, on balance, are those who are developed inside the company but manage to retain an outside perspective. This is advice I which I had heeded when I was responsible for finding a new CEO at Seventh Generation.
Interesting that this piece suggests that maximizing the shareholder portfolio is optional.
“This set (of beliefs) has influenced them (CEOs) to place way too much emphasis on maximizing shareholder value and not enough on generating value for society.”
I thought maximizing shareholder profits was the law of the corporate land, and a big part of the problem.
I’ve tried to research this topic some asking myself if there a deeper reason why shareholders have priority over society. I found a court ruling when the Dodge brothers sued Henry Ford. Henry Ford tried to give profits back to employees. As the Dodge brothers were shareholders in the Ford company, they won the suit that as shareholders, they had priority over the employees. Is anyone else familiar with this case and could this have started a strong precedent that has lead to the situation we have today? If this truly is a legal issue, maybe that is where the change must occur.
Matthew,
Thanks for your reply. I too, am wondering if laws mandating’shareholders first’ shouldn’t be getting more attention. And, why they aren’t.