Enlightened Stakeholder Value
Fenway has been dedicated to the business of business enlightenment for over twenty years so it was nice to see the 2006 Companies Act charge directors with securing ‘enlightened stakeholder value’. Unfortunately, this has changed little in the world of business.
In terms of fiduciary duty, it seems the board need only minute that has considered more than just the shareholders during its deliberations.
In terms of performance, it had had no impact at all. No director can please all of its stakeholders all of the time. There is an intrinsic conflict of interest when shareholders, customers, employees and suppliers all want more for less. Indeed, Michael Jensen at Harvard argued seven years ago that it is ‘logically impossible to maximize in more than one dimension’. Purposeful behaviour, he argues, ‘requires a single, valued, objective function’ and suggests that the ‘maximization of the long run value of the firm as the criterion for making the requisite trade-offs among its stakeholders.
Unfortunately, the City does not think in relation to ‘the long-run’’ and is quite happy to give Terry Leahy, the head of Tesco, a hard time despite unparallel maximisation of long-term value over the last decade.
For Fenway, business enlightenment is less about the score and more about the way you play the game. True prosperity stems from passion, vision, commitment and values not the size of the bank account. Lousy teams can play a lousy game and still fluke a 1 – 0 win but a temporary victory cannot hide a lack of talent, foresight, energy, love or strategy.
So, despite the new legislation, organisations will continue to shed jobs, cut corners and squeeze suppliers. Directors will comply with the Companies Act via a little paperwork but while ever greed is the prominent factor within the business, some stakeholders will see little value or enlightenment from anyone steering their ship.
In terms of fiduciary duty, it seems the board need only minute that has considered more than just the shareholders during its deliberations.
In terms of performance, it had had no impact at all. No director can please all of its stakeholders all of the time. There is an intrinsic conflict of interest when shareholders, customers, employees and suppliers all want more for less. Indeed, Michael Jensen at Harvard argued seven years ago that it is ‘logically impossible to maximize in more than one dimension’. Purposeful behaviour, he argues, ‘requires a single, valued, objective function’ and suggests that the ‘maximization of the long run value of the firm as the criterion for making the requisite trade-offs among its stakeholders.
Unfortunately, the City does not think in relation to ‘the long-run’’ and is quite happy to give Terry Leahy, the head of Tesco, a hard time despite unparallel maximisation of long-term value over the last decade.
For Fenway, business enlightenment is less about the score and more about the way you play the game. True prosperity stems from passion, vision, commitment and values not the size of the bank account. Lousy teams can play a lousy game and still fluke a 1 – 0 win but a temporary victory cannot hide a lack of talent, foresight, energy, love or strategy.
So, despite the new legislation, organisations will continue to shed jobs, cut corners and squeeze suppliers. Directors will comply with the Companies Act via a little paperwork but while ever greed is the prominent factor within the business, some stakeholders will see little value or enlightenment from anyone steering their ship.
