Customers should come ahead of shareholders

Corporations should stop trying to maximize shareholder value. Instead, they should try to maximize customer delight.

That’s a key idea in Roger Martin’s new book, Fixing the Game: Bubbles, Crashes and What Capitalism Can Learn from the NFL.

You can read it quickly and enjoy it, even if you’re not a football fan.

In the NFL, there are two arenas where the game is played: (1) The football field, where teams make passes, blocks, tackles and score touchdowns, and (2) The expectations market, where gamblers try to guess who will win and place bets on one team or another.

Similarly in business, there is the real world, where companies sell goods and service to customers and try to increase profits. Then, there is the stock market, where investors place bets on companies they hope will outperform rivals.

Martin, the dean of University of Toronto’s Rotman business school, thinks it’s perverse to use stock-based incentives to reward executives. They distort behaviour and lead to excess risk-taking to earn outsize returns.

He admires NFL Commissioner Peter Rozelle’s firm stand, back in 1962, to ban players and coaches from betting on football games.

The NFL realized that, just like a parasite that eventually kills its host, sports betting had the ability to destroy the sport. So, it enforced a strict separation.

But in business, the players in the real game are encouraged to invest heavily in the expectations game. CEOs get stock options to ensure they focus on maximizing shareholder value. They talk frequently to stock analysts about future earnings and give guidance for traders. Says Martin:

When the real market is dominant, customers are the focus and the central task of companies is to find ever better ways of serving them. When the expectations market is dominant, traders are the focus and gaming markets is the task.

The real market produces meaning and motivation for organizations. The organization can create bonds with customers, imagine great plans and bring them to fruition.

The expectations market, on the other hand, generates little meaning. And over time, in trading businesses, since there isn’t opportunity to build something positive for the world, the motivation migrates to earning as much compensation as possible.

He talks about Johnson & Johnson, which adopted a corporate credo in 1943: Customers first. Employees second. Communities third. And shareholders last.

In 1982, when cyanide-laced Tylenol caused seven deaths in Chicago, J&J developed tamper-proof packaging for all its products, an innovation that would become the industry standard.

The company didn’t use insincere apologies to downplay the crisis, as BP did last year after its massive oil spill in the Gulf of Mexico.

Johnson & Johnson’s investors are doing just fine. So are those who own shares in Procter & Gamble, which also puts consumers first and expects shareholder value to follow.

Then, there’s Apple, whose CEO Steve Jobs is the model of a customer-focused executive.

All three companies have stumbled from time to time, Martin says. But they’ve outpaced their peers in creating value for shareholders, while putting customers ahead.

If you take care of customers, shareholders will be drawn along for a very nice ride.

The opposite is simply not true: if you try to take care of shareholders, customers don’t benefit and, ironically, shareholders don’t get very far either.

Martin has just won a 2010 McKinsey award from the Harvard Business Review for an article called The Age of Customer Capitalism, which laid out the thesis for this book.

Customer delight is a noble goal, in my opinion. Many companies talk about it, but few pull it off.

Companies need to invest in excellent systems and staff on the front lines. They can’t see customer service as a cost to be cut again and again.

Here’s a challenge for my readers. Which companies treat you with respect and make it a joy to deal with them? Please provide any names that can serve as an example to others.