Gary Hamel, #Capitalism, #Censorship and resistance to change

Photo by oceanaris

I read a great article by Gary Hamel the other day titled: Capitalism is Dead. Long Live Capitalism. Every time I read one of his articles, I am amazed to see how he is able to write everything I think about just better and with more compelling examples.

Here is my favorite quote:

I am an ardent supporter of capitalism—but I also understand that while individuals have inalienable, God-given rights, corporations do not. Society can demand of corporations what it likes. That’s why self-serving beliefs are also, ultimately, self-limiting.

Of course, as consumers and citizens, we must acknowledge that companies can’t remedy every social ill or deliver every social benefit. We must also face up to our own schizophrenia. We can’t expect companies to behave responsibly if we blithely abandon our own principles to save a buck.

I wrote in the comments to the article. For some reason, my comment still does not appear on the site. Maybe I am being censored. Well, in the age of the internet, I don’t need the Wall Street Journal to publish my comment. I can do it myself. Time to adapt. Below is what I wrote.

Seth Godin wrote a while back: “And almost without exception, organizations are run by people who want to protect the old business, not develop the new one”. Larry Lessig has repeated this lesson many times: “1. Creativity and innovation always build on the past. 2. The past always tries to control the creativity that builds on it.  3. Free societies enable the future by limiting the past.  4. Ours is less and less a free society“ (See more on this issue here: http://tinyurl.com/3yr6wcd).

Gary is absolutely on the point. While Capitalism, in its current form, has done much good for society, we start to see its limitations as the world progresses. The problem is, like any faith or religion, Capitalism tries to protect itself by becoming more fundamentalist and more resistant to change. When religions start to behave like that, you know the end is near or you are approaching dark ages. Instead, Capitalism should be developing with the times. This is hasn’t been happening enough. This last crisis and other processes the world is going through is a great opportunity to start changing that and raising question marks regarding some of Capitalism’s assumptions and we can all make it better.

One example: Shareholder value. As I have written elsewhere (see: http://tinyurl.com/3xekuut), this concept needs a wide redefinition, aligned with some of the ideas Hamel is writing about here in this post. Unless we act and make sure that concepts and ideologies go through evolution and do not stagnate, we have nobody to complain to, but to ourselves.

Elad

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Thoughts about the idea of shareholder value

Photo by Ben Sutherland

I was listening to an old HBR.org Ideacast this week titled “The Most Influential Management Ideas of the Decade”. An interesting podcast dealing with even more interesting ideas. But what caught my attention was the first item they talked about. “Shareholder Value as Strategy”. This idea has many facets, and in the podcast itself, they were discussing whether it is on the list because of its success or failure as a concept.

This is an issue I have been grappling with for a while now. This is what I wrote in the past:

Companies have one goal

I believe that companies have only one goal. Ask Eli Goldrat. Their goal is to make a profit for their shareholders. There is only one outcome for a company: profit. Now, don’t get me wrong. I think helping the community and the environment is important and great, but it is not an outcome or a goal of a company. It is a side effect, although sometimes, a good one.

The problem with the idea of “Shareholder Value as Strategy” as with my quote above is the definition of value or profit for shareholders. While the traditional definition (generally speaking) is sustainable, growing dividends, today, most people will think about it as a rise in the stock price of the company’s share. And herein lays a big part of the problem for me, as I think the concept of the public company, as a social enterprise, has outgrown its value. I wrote about it in the past in a post titled “Are public companies creating value or are they suffering from the law of diminishing marginal return”. Here is a short excerpt:

The problem is that the structure of public companies and the stock market creates the wrong incentives. Instead of investors looking for expert managers to ensure their investment grows by creating more value, the investors (directly or indirectly using all kinds of funds) are searching to make profits out of the volatility of the markets.  When you have 1,000$ (or less) invested in a company, you are not interested in the value generation or in drawing dividends, but in the impact on the value of the share, so you can sell it…

I think that stock markets have a diminishing marginal return and we have crossed the point where they become less effective the bigger they get. Perhaps the near future will lead to a surge in the number of private companies.

I was listening to The HBR.org ideacast the same day I started reading Mihaly Csikszentmihalyi book Good Business: Leadership, Flow, and the Making of Meaning. Csikszentmihalyi makes many points relating to this issue, however, this is one quote I particularly felt connected to:

Public ownership of companies is intended to spread the bounty of capitalism widely. But the relationship of stock owners to the companies in which they invest tends to be impersonal. We seldom care about what a firm makes – whether it is cheap weapons, poisonous pesticides, or vacuous entertainment. We pay little attention to how it markets its products, or how it treats its customers, or how it affects the community where it operates. As long as it makes profits, we endorse its management. But let the CEO’s performance slip one-quarter, and we hasten to take our nest egg elsewhere. Not surprisingly young managers learns quickly that the quarterly report is almighty, and live in terror of its recurring shadow ever after

The more I think about the more convinced I become that Shareholder value through rise in stock price is a fundamentally bad idea. It started out as a great idea and has done a lot for the development of the world. In their widest definition, companies are social entities that are supposed to be used for the benefit of society. They do that by maximizing profits. But when profits equates with stock price in today’s modern markets, the original benefit are not always realized. Actually, sometimes, we achieve the opposite. It is time to start re-thinking and re-shaping the way public companies operate and create value.

Elad

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Lessons learned through a discussion of the Amazon-Zappos deal

Last week as we heard the news of the Amazon-Zappos deal an on-line discussion started between a few of my fellow students at the AGSM MBA. We discussed whether it was a good idea, what will the effect of it on the culture of the two companies, etc.

Amazon has always been a company I admired (and had some very good customer service experience with), so I was glad that as part of the discussion and even more glad to come by this movie clip of Amazon CEO and founder (Thanks Amit). You never know how much of what the CEO is actually saying is happening in real life. But, there is no doubt that Amazon is a success story. And I think that the principals they stand for and Jeff Bezos is presenting in the video are very similar to things I write about a lot in this blog.

Obsess over customers (not over competitors) – I love this approach. First, because it takes the company out of the regular We (or I) culture. As humans we attribute to much importance to ourselves in the mind of others. And this translates to companies’ strategies and tactics that focus on the company and not on the customer. Nobody really cares about company X. People care about themselves. But the second part of this concept is even more important. We spend so much of our lives comparing ourselves to others, using benchmarks, thinking – I want to be like him/her. We forget to be ourselves. We forget to excel at what we do. We forget to exploit our comparative advantage. Instead of focusing on them, we should focus on us. And I know what you are thinking. Isn’t that a contradiction? You just said that we should stop with the culture of we. Well it isn’t. They can co-exist. And anyway, F. Scott Fitzgerald famously said that “the true test of a first-rate mind is the ability to hold two contradictory ideas at the same time”.

Invent – There is no doubt in my mind that the need (and ability) to invent is and will be the hallmark of successful people and companies in our changing world. Not only invention of new products but also of process, of business models, of ideas and of sharing mechanisms. A company that puts invention as its core belief represent, in my mind, a great manifestation of everything that is good in the capitalistic system.

Think long term for customers not according to customers – Again, two very strong ideas. Long term. The financial crisis has proved, if any more proof was needed, how important the idea of long term thinking is. Again, it is a manifestation of a very basic human trait that is discussed a lot these days. The need for immediate gratification. I hear about the Gen Y phenomena and the fact that people today are looking for immediate gratification and I involuntary cringe. This is not something we should celebrate. This something we should avoid. I think mentioning the famous marshmallow experiment is enough to make my point. Patience and perseverance, in the business world are essential. The second part of this concept is about customers and that they don’t always know what they want. Listen to your customers, but don’t be entrapped by them.

And not less important: “it’s always day one”. There is always more to learn, discuss, improve and question.

Elad

Capitalism, Hard work, Economists and Businessman

Today I am letting you make the connections yourselves. Yesterday I read three interesting articles. I am not sure how they connect. I am still trying to make the connections myself. Here are my favorite quotes from each:

Capitalism

For all its obvious blemishes and needed reforms, capitalism alone holds out the most creative and dynamic force that any civilization has ever discovered: the power of the free, ambitious individual (George M. Taber in A Question Revisited: Is Capitalism Working?)

Hard work

It’s hard work to make difficult emotional decisions, such as quitting a job and setting out on your own. It’s hard work to invent a new system, service, or process that’s remarkable. It’s hard work to tell your boss that he’s being intellectually and emotionally lazy. It’s easier to stand by and watch the company fade into oblivion. It’s hard work to tell senior management to abandon something that it has been doing for a long time in favor of a new and apparently risky alternative. It’s hard work to make good decisions with less than all of the data. (Seth Godin in A Brief History of Hard Work, Adjusted for Risk)

 Economists and Businessman

Keynes was right: Economics is a difficult and technical subject. It is no harder to be a good economist than it is to be a good business executive. (In fact, it is probably easier, because the competition is less intense.) However, economics and business are not the same subject, and mastery of one does not ensure comprehension, let alone mastery, of the other. A successful business leader is no more likely to be an expert on economics than on military strategy (Paul Krugman in A Country Is Not a Company)

Hhow do you think these three ideas connect?

Elad

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