Simon Says...The end of Jack Welch capitalism?

Latest Blog from Simon Court, CEO

Not long ago, people used Jack Welch as the ultimate reference point for excellence in strategic leadership. How times change. He realised it himself and last year he called shareholder value, which he had personally championed, “the dumbest idea in the world”. He added: “Shareholder value is a result, not a strategy…

Your main constituencies are your employees, your customers and your products.” Richard Lambert, director-general of the CBI (the British employers group) suggested in a recent speech that the era of “what you might call Jack Welch capitalism” was drawing to a close.

The drive to improve returns to shareholders at the expense of other stakeholders has been criticized by leading business figures in the wake of the global economic crisis for being too focused on the short term. Now we are starting to hear from leaders who believe in a different philosophy. In an FT interview this month, Paul Polman, Unilever chief executive, said “I do not work for the shareholder, to be honest; I work for the consumer, the customer. I discovered a long time ago that if I focus on… the long term to improve the lives of consumers and customers all over the world, the business results will come."

This debate will inevitably end up exploring how to structure executive pay to ensure chief executives are encouraged to think about more than how to maximize short term performance. But something else matters too. Boards need to understand their role in ensuring the company has a credible strategy to drive real market measures such as revenue growth, market share, profits and book equity return.  Strategy-led performance involves a much fuller development of the board's role in providing leadership to a business as pointed out in a report published by the Performance & Reward Centre in 2005*. The authors put it this way: “We are suggesting the need and potential for a much fuller development of the board's role in the leadership of a company. The demands of shareholders are still taken absolutely seriously but they are treated as a necessary, but not sufficient, condition for high performance. Rather than simply conforming to shareholder demands for immediate financial performance, the board's central preoccupation is with setting long-term corporate objectives and monitoring executive performance in relation to these.”

The real market, not the stock market, is where products are produced, revenues earned, expenses paid and profit logged. Focus on delivering those things and the shareholder value will come.

*The Role of the Board in Creating a High Performance Organisation by Dr John Roberts & Don Young, published by the Corporate Research Forum, Performance & Reward Centre, November 2005

April 2010