Shareholder value: the enemy of good marketing

The enemy of good marketing
Market Leader Winter 2009

Rather than challenge shareholder value (SHV), marketers have tried to adapt to it, with unfortunate consequences. SHV affects everything marketers do, striking to the heart of questions like:

  • Why are most companies run for the short term?
  • Why are so few truly customer focused?
  • Why doesn't marketing feature on most boardroom agendas?

That's why it's important for marketers to challenge SHV, and replace it with something better. SHV is bad for marketing because:

1. It views the shareholder as the only constituent, treating customers, employees, and communities as minor players. This reflected Milton Friedman's dictum that 'the managers' sole responsibility was to make money for shareholders'.

2. As Jack Welsh, former CEO of GE, says, 'Shareholder value is a result, not a strategy … your main constituencies are your employees, your customers, and your products'.1

3. CEOs and boards have become obsessed with short-term financial results, to feed the SHV concept: 'Boards devote nine times more attention to spending and counting the cash flow, than to wondering where it comes from, and how it can be increased.'2

4. As a result, longer-term innovation, and brand building are stifled. In every down-turn, with metronomic regularity, companies cut marketing, capex, R&D, and people development, despite convincing evidence that this destroys long-term value.


Alfred Rappaport expounded the original principles of SHV in the early 1980s.3 His version emphasised long-term economic value rather than short-term accounting earnings. The key principle of SHV was that companies were to be run for the sole benefit of shareholders, the owners.

SHV was a reaction to poor asset utilisation in previous decades. In earlier days, it had a positive effect, encouraging a leaner operating style.


SHV 'didn't start perverted, it became perverted'.4 Many of the corporate disasters of the past decade were due to this.

The main cause of abuse of SHV was the development of share options as the major part of senior executive remuneration. In 1960, 2% of senior executive pay was tied to stock options.5 Now most of it is. In theory, share options would align the interests of owners (shareholders) and senior management.

It didn't work out that way. Many companies became managed for short-term share price gains, enabling senior management to capitalise their share options quickly. Financial Directors became expert at massaging accounts; advising how to cut people and investment to inflate short-term results; and exploiting leverage, securitisation, and derivatives.

A 2005 study of 401 financial executives revealed that 'a startling 80% of respondents said they would decrease value creating spending on R & D, advertising, maintenance, and hirings, in order to reach benchmark earnings'.6 Auditors were passive, often with conflicts of interest. This was not what Rappaport had intended.


Today's SHV does not differentiate between 'good' profits, which are genuinely earned, and 'bad' profits, which are manipulated.

'Good' profits are earned by sustained effort, through raising productivity, improving customer value, wise investment, innovating, and developing people's skills. P&G, Apple, and Google produce 'good' profits.

'Bad' profits involve financial manipulation by legally 'cooking the books',7 and mortgaging the future for short-term gain. Enron, and WorldCom were extreme examples of this.


Rappaport recently commented: 'I kept saying long-term, long-term, long-term … to me SHV was not about an immediate boost to stock price'.

Equally, Jack Welsh was not doing a U-turn in recently saying SHV was 'the dumbest idea in the world'.8 He was referring to the perverted version of SHV that is practised today. The consistently improving share price of GE during his leadership was the result of ruthless market focus; creating profitable service businesses; rigorous cost control, and people development.

The first wave of SHV casualties – including Enron, Tyco, Global Crossing, Sunbeam, Marconi, and WorldCom – devastated shareholders, employees, and some customers. The second, mainly in financial services, the arch exponents of SHV, adversely affected almost every living person.

These extreme examples are the tip of the iceberg. Modern SHV stifles long-term value creation, and frustrates good marketing. It has not even been a success for shareholders – the FTSE World Index has generated less than 1% a year cash return over the past ten years. The USA and UK, which took SHV to excess, were the worst performers, and actually declined.9

If shareholders, employees, and customers have not benefited from SHV, who has? CEOs and senior managers, especially in USA and UK; Fund managers and investment bankers. They remain the most vocal supporters of SHV.


Influential and long-standing critics of SHV, as practised today, include John Plender, John Kay, Stefan Stern, and Michael Skapinker, all of the Financial Times; Robert Bruce, accountancy columnist for The Times; Professors Samantha Ghoshal of LBS, J.Pfeffer of Stanford; Mark Goyder of Tomorrow's Company; many CEOs, and, not least, Peter Drucker.

An anti-SHV movement is developing among MBA students, led by Harvard, a reaction to the leading role some of their predecessors played in pursuing it.10


SHV is about 'shareholder first'. But why do shareholders deserve such privileged treatment?

Do they provide capital? Yes, but there are cheaper ways to raise it. Do they add value to strategy or performance? Rarely. Do they make shareholders' voices heard? Sometimes, faintly. Are they committed to the company's long-term future? Rarely. Do they have conflicts of interest? Often.

Today's shareholders are primarily pension funds and fund managers. In theory, they represent the interests of millions of individual pension holders and investors. In practice, they are unconnected to them, and operate in the shadows of Wall Street and the City. Lord Myners described them as 'Absentee Landlords'.

Pension fund managers focus on satisfying their Trustees. Fund managers concentrate on 'performance' – though they rarely achieve it. Both have short-term perspectives. They may also have conflicts of interest, since their companies often have multiple relationships with corporate clients. In acquisitions, they frequently own shares in both the acquiring company and the target. So which shareholders do they represent?

Long-term commitment? 50 years ago, the average holding period for shares was eight years. Now it's less than one year. For some stocks, below 30 days. By contrast, employees stay with companies for six years, and some customers remain loyal for decades.

And how does short selling of shares fit into SHV theory? In short selling, the shareholder rents out shares to third parties (e.g., hedge funds), which expect to profit from their decline. Shareholders doing this are profiting by betting against their own team.

Many so-called shareholders are no more than unresponsive intermediaries – speculators, to whom we give the rights of ownership.12


The economic importance of shareholders is declining, and the moral justification for their primacy is weakening. By contrast, employees, customers, and the community are increasing in importance. In most Western countries, over 70% of GNP is in services, where people are the product. There is a battle for talent at all levels. The same applies to customers. In fiercely competitive markets, gaining and holding customers is the most important and difficult task of all. Good marketers view customers not as people to extract value from, but to add value with.

The voice of communities, special interest groups, and the cynical public, is strengthening daily, aided by the internet, and social networks.

In a recent McKinsey study, 84% of executives and 89% of consumers believed that obligations to shareholders should be balanced by contributions to the broader public good, e.g., providing good jobs, minimising pollution.

Talent and loyal customers, not capital, are now the scarce resources.


One specific marketing response was assetbased marketing (ABM), first described by myeslf in a 1979 series of articles.13

'Asset-based marketing is a supplement to, not a substitute for, customer orientation.

'Alongside the search to identify customers and understand their needs should run an examination of the assets of the company, and ways to use them more effectively in the market place.'14

Hamel and Prahalad's work on Core Competencies enabled ABM to be further extended. Effective marketers both delight customers and build long-term profits by 'converting company assets and competencies into customer value'.15

In the 1980s, there was some classic ABM, e.g., Lucozade, but good examples have since become rarer. In the past decade, ABM, like SHV, has become perverted. ABM's intention was to expand customer franchises efficiently, not to produce a welter of 'Me-Three' line extensions, which reduce efficiencies and add no long-term value.


Have all companies practised the short-term version of SHV? No. In Continental Europe, there has been consistent opposition. In the USA and UK, many leading companies with strong brands have delivered value to shareholders over many decades, by giving priority to all stakeholders. Examples include Tesco, Colgate, Nestlé, Johnson and Johnson, PepsiCo, FedEx, UPS, Kimberley Clark, Wal-Mart, and P & G. They have practised Stakeholder Value.

So have the better-managed family-run businesses that account for over 50% of the workforce in many industrialised countries. McKinsey/LSE's study of 700 family-owned companies in USA and Europe showed that the 36% operated by outsiders outperformed PLCs. Likely reason – family ownership enables professional managers to take a long-term view, unaffected by short-term earnings pressures.16

So can SHV be saved by returning to Rappaport's original concept? I think not. SHV retains a fundamental flaw – giving primacy to shareholders, above all other stakeholders.

Shareholders provide the capital. Others maximise its long-term value.


The term 'Stakeholder Value' (STV) is not new. It was popularised in a book by Edward Freeman, published in 1984. Much of STV writing is theoretical, including attempts to combine it with the original SHV concept. A modern theory of STV, incorporating learning from the last decade, is now urgently required. Plus a set of practical actions to turn this into reality.

To frame modern principles of STV, we need to answer questions such as: 'What is the purpose of capitalism?' and 'What's a business for?' Here's a start. The purpose of capitalism is to create wealth in a fair, open, and efficient way, to fund financial security and a reasonable quality of life for the majority (e.g., shelter, health, education, pensions, safety).

And the purpose of businesses? To efficiently deliver superior value to customers, through skilled and motivated employees, leading to long-term profitable growth.

Under Stakeholder Value, profits are the result of well-directed activities, and the reward for good performance.

The famous Johnson & Johnson credo, written by General Johnson in 1943, is probably the best statement of STV. And the purpose of STV? To stimulate the development of economic value, and to spread the benefits equably across all stakeholders who have contributed to its creation.

An STV business is a committed enterprise, built for long-term performance, with:

  • inspiring vision and values
  • clear and compelling strategies, consistently followed
  • rigorous market, segment, and brand prioritisation
  • consistent innovation
  • superior customer value
  • high employee morale
  • tight cost control
  • concern for all stakeholders.


This section is topline – details will be provided in my forthcoming book, LISTEN! (All suggestions welcome – I do not pretend to have all the answers.) As a start, here are five suggested changes:

1. Stakeholder Alignment

Stakeholders are people or organisations with an impact on long-term company success. They usually have conflicting needs, and companies seek to unite them through shared vision and values.

Well-run companies seek convincing answers to:

  • Who are our main stakeholders?
  • How do we prioritise them?
  • How do we align their conflicting interests?

In a survey of 70 UK and USA company leaders, 50% considered shareholders most important, 33% customers, and 17% employees. Over time, the customer will become the number one stakeholder.

Few companies prioritise and align stakeholders effectively. A good formula for doing so is: Committed customers + motivated employees = happy shareholders.17

2. Customers on Boards

Employees and shareholders are represented on boards. Why not customers too? It's time to bring the fresh air of the marketplace into boardrooms.

How would the two customer directors be selected? By a randomly chosen panel of employees, and the director positions would be widely advertised.

What would their main responsibilities include? Reviewing company and competitive products and services; talking to customers and frontline employees; keeping track of market research, and initiating more; and, most importantly, getting customer issues discussed by boards. One customer director would automatically serve on the remuneration committee.

Who might become customer directors? Any qualified member of the public, with some knowledge or experience of the relevant markets, especially as customers. This change would probably increase the number of women on boards.

How would chief marketing officers (CMOs) work with customer directors? Closely. Unfortunately CMOs are rarely on boards, and few nonexec directors have backgrounds in marketing. Customer directors would be prime channels to the board for CMOs.

3. Employee Remuneration

All employees are stakeholders, not just senior management. However, in many companies, there is a 'Them' and 'Us' approach to both the scale and structure of remuneration. Many CEOs in the USA earn 200 to 300 times the average employee income, using opaque structures including bonuses, share options, golden 'hellos' and 'goodbyes', and so on. The UK is not far behind.

This is contrary to the values of STV – fairness, honesty, and openness. There is a case in equity for reducing differentials, closer to levels in Continental Europe; and for using the same structure of salary, performance bonus, and pension for everyone. Where bonuses include share options, the exercise period should be three to five years, to encourage long-term value creation.

Remuneration consultants will argue that this would cause a talent drain. This seems unlikely. In any case, it is questionable whether people whose primary motivation is money are best equipped to lead companies. Any possible loss of talent at the top would be more than compensated for by better teamwork at all levels.

4. Shareholder Loyalty Rewards

Today's high churn of shares is inconsistent with the concept of ownership. Customers get loyalty bonuses, employees often get longer holidays or more pay for longevity. Why not shareholders too?

A survey of pension fund trustees by the TUC found that 69% agreed with the statement: 'there should be incentives to hold shares for the long term.'18

One possible approach would be to make dividends and access to rights issues available only to shareholders with at least one year's tenure, and to use the resulting savings to fund loyalty bonuses for two- and three-year share retention.

5. Stakeholder Performance Measures

Company reporting focuses on shareholder not stakeholder measures, in particular P&L, balance sheet, and cash-flow.

Much useful work has been done on additional stakeholder measures such as market share; customer satisfaction relative to competition; employee attitudes and retention; investment as a percentage of sales, to include advertising, capex, product and people development (the I/S ratio); and contribution to the community.

Regulators have an opportunity to implement such measures, so evaluating returns to all stakeholders.


SHV has been very damaging to good marketing. The SHV debate is highly active now, since many see it as a dark presence behind the global financial crisis.

The debate is being led by economists, financiers, and business journalists. It's time for marketers and marketing bodies to join in. Their customer focus, and involvement with a wide range of employees, provide a unique and valuable perspective.

There has never been a better opportunity to press the case for Stakeholder Value, building an environment in which effective marketing will flourish.


1. Welsh, J. (2009) quoted in Financial Times, 12 March.

2. Ambler, T. (2000) 'Marketing and the Bottom Line', FT. Prentice Hall

3. Rappaport, A. (1986) Creating Shareholder Value. Free Press.

4. Mendoca, M. (2007) Interview with Daniel Yankelovich, McKinsey Quarterly, No2.

5. Handy, C. (2002) 'What's a business for?' Harvard Business Review, December.

6. Quoted by Rappaport (2006) in '10 ways to create shareholder value', Harvard Business Review, September.

7. Davidson, H. (1997) Even More Offensive Marketing. Penguin.

8. Reported in Financial Times, (2009) March.

9. Money Management, (2009) 'Sector performance tables'. July.

10. Skapinker, M. (2009) 'The students who swear by a business school', Financial Times, 23 March.

11. Quote from Butch Cassidy and the Sundance Kid.

12. Bower, J. Professor at Harvard Business School, quoted by Stern, S. (2009) Financial Times, 28 March.

13. Davidson, H. (1979) 'Asset-based maketing 1 & 11', Marketing Week, and Even More Offensive Marketing.

14. Wolfe, A. (1993) Profit from Strategic Marketing. Pitman.

15. Davidson, H. (1997) Even More Offensive Marketing. Penguin.

16. Dorgan, S., Dowdy, J., Rippon, T. (2006) 'Who should – and shouldn't run family businesses'. McKinsey Quarterly, No 3.

17. Davidson, H. (2006) The Committed Enterprise. Elsevier.

18.Stern, S. (2009) 'Short-term shareholders changing the face of capitalism, Financial Times.


Hugh Davidson is a former chairman of The Marketing Society. He has worked at senior level in over 100 categories across 15 countries for P&G, United Biscuits, Playtex International and Oxford Strategic Marketing, which he co-founded.

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