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A Tale of Customers, Employees, and Investors: Balancing the Constituencies

Posted by Bob Warfield on May 9, 2008

I try hard not to stray into politics or religion in this blog, but recent posts by Mike Loukides on O’Reilly and now Larry Dignan chatting with Vinnie Mirchandani about the constituencies a corporation serves and the relative value of each force me to step close to the line.  I confess neither posting sat very well with me in terms of balance.

First, Mike Loukides didn’t even mention the customer consituency in his post which was title, “The Corporation’s Two Bodies.”  Is it any wonder that sometimes investors or employees can forget one of the other constituencies in the heat of trying to get what they think they’re entitled to?

Vinnie, by way of Larry, starts out on a good track by asking whether Technology companies cater to Wall Street interests too much at the expense of a good strategy.  SaaS presents us with a brilliant example there.  Most conventional public software companies are incredibly hobbled in the pursuit of SaaS because of the fact that it delays revenue but not expenses so that a company in transition to SaaS suddenly looks like it is doing very poorly according to Wall Street’s yardsticks.  But then Vinnie crosses the line for me when he asks whether the customers and employees are more important than the shareholder interests.  He suggests that there are outcomes that are great for employees and customers and terrible for shareholders that actually really good.  And finally he asks why we listen to Wall Street when they can’t seem to manage their own business, given the woes with the ledning system.

Of course it’s the Microsoft-Yahoo (shouldn’t Yahoo’s name come first?  the fact it almost never does tells us something) drama that brings this nascent topic to the surface at this moment in time.

First, there is a lot of knee jerk in these posts.  Many scenarios are presented and acted on in isolation of a real doctrine or philosophy to guide judgement.  It makes for interesting reading, but it’s situational ethics, which seems to me is something the writers would think of as the shareholder’s dangerous modus operandi.

So, let me put forth a philosophy or point of view.  Each of these three consituencies has made a contract with the corporation:

– The employee will work in exchange for his wages and benefits.  She may receive stock options, and hence be made a shareholder of sorts, although most shareholders who buy long shares see the options as a very cheap way in.  Put that aside, there is a fair bargain that was entered into by both parties.  Services in exchange for consideration.

– Customers receive a product or service in exchange for whatever the company is charging.  If they work on an advertising model, the payment is in the form of attention (from the good ole attention economy).  More typically, cash is the medium of exchange, although many things are certainly possible.  A customer might contribute content or there may be a barter system of some kind in place.  But, once again, there is a fair exchange agreed to by both parties.

–  The evil investors (I call them evil because the posters above seem to view them as such) have also agreed to a fair exchange.  They have provided investment capital to the company in exchange for their shares.  This was done in the expectation that the shares would appreciate and hence the investor could make a profit. 

That’s pretty straightforward and above board.  Now let’s look at some of these terrible scenarios in light of the bargains made.  I want to understand who is breaking their bargain, because to me, that’s the source of the problem.  For a particular constituency to simple expect the bargain they made be upheld seems to me entirely reasonable, and not evil after all.  Can you see where I’m going?

Start with what set Mike Loukides off.  That was The New York Times quotes Laura Martin of Soleil Securities, as saying “This is management putting its employees and its job security ahead of current Yahoo shareholders’ interest.”  Well sorry Mike, but aren’t the investors simply reminding the company that a bargain was struck and that in their view management is now ignoring that bargain so that one of the other constituencies gets a better deal?  Of course Loukides immediately blows the shareholder position out of proportion by suggesting, “Where did the notion arise that management’s sole responsibility is to its funding sources?”  But that’s just puffery.  How was management being asked in any way to make its funding sources their sole responsibility?

So too with Vinnies remarks (again via Larry Dignan):

– Isn’t what a company does for customers and developers (employees) more important than shareholder interests?

Why is it more important Vinnie?  When the bargain was made, the company wanted the capital.  It did not make a bargain that says, “You can put in this capital, but you’re going to take a secondary role to customers and developers.”  Such bargains are possible.  Two tiered stock schemes say essentially that, as does subordinated debt.  But that wasn’t the bargain made.  Let me turn the question around.  Why should shareholders be asked to forget the bargain made with them so that a the other constituencies can get more than they bargained for?

–  Why listen to Wall Street at all? 

Oh come on, that was uncalled for.  There certainly are no end of folks in any of the three constituencies whom we could conclude are indicative that we should never listen to an employee or a customer by this logic.

Larry’s examples of why it’s bad to honor the contract with shareholders are equally as uncompelling to me.

– Microsoft-Yahoo:  Most of the world seems to think both Microsoft and Yahoo ought to do something.  Shareholders are voting with their own pocketbooks what that ought to be.  Am I now suddenly not entitled to sell my shares and make Yahoo’s stock go down if I don’t like their strategy?  Makes no sense.

– AMD:  Same story as Microsoft-Yahoo.  I get to vote with my shares.  It’s a free market.  What could be more democratic and less evil than that?  Moreover, I get to speak my mind to management.  Again, where is the evil there?  Lastly, part of the bargain inherent in the governance of the company is I get to vote the board.  Why should you be allowed to change the bargain I made and have already paid for because you happen to like their product?

– Amazon:  Taken to task for making investments that involved too much capital spending and resulted in lower share prices when that wound up being Amazon Web Services, a really good thing.  Let’s be real, it was a really good thing in 20/20 hindsight.  The investors never heard about it nor bought into the vision.  They just saw lousy profitability compared to similar businesses.  And they voted their shares.

It’s times like these when I am reminded of this quote:

“It has been said that democracy is the worst form of government except all the others that have been tried.”
Winston Churchill (1874-1965)

I might paraphrase it in this way:

It has been said that capitalism is the worst form of economic system except all the others that have been tried.

But there is a good one for that too:

Capitalism is the unequal distribution of wealth.
Socialism is the equal distribution of poverty.

A good corporation will honor the bargain made with each constituency and not at the expense of any constituency.  Perhaps that’s a good interpretation of a “do no evil” corporate charter.

2 Responses to “A Tale of Customers, Employees, and Investors: Balancing the Constituencies”

  1. vmirchan said

    Larry got the spirit of my comments generally right…but not don’t listen to Wall Street at all. Of course, you cannot ignore investors – surest way to get fired. My bitch was we listen too much to Wall Street. And I am working on a post where I will show several areas where what Wall Street measures is a out dated view of many tech markets and frankly in those areas tech execs should not listen to Wall Street.

  2. smoothspan said

    I think it’s fine for a company to ignore Wall Street for a time, or at least minimize their concerns. But the company (and its employees) should be prepared to accept a lower stock price in the interim without too much squawking. It’s unreasonable to expect to have your cake and eat it too.

    All three constituencies need to be balanced without statements that indicate one is more important than the others. Contracts were entered into with each that specify what each can and should expect. Sacrificing one group to appease another is unfair and is not a long-term sustainable strategy.

    I’m not convinced we listen “too much” to Wall Street. Wall Street lets most companies stray pretty darned far before there is much risk of management being replaced. There are plenty of examples where that was the case and we might wish Wall Street were more proactive. What I don’t understand is why it is reasonable for management to expect Wall Street not to ding the stock when they stray from profitability? However great their plans may be, they usually are not fully disclosed and they almost always involve risk. In my mind, the drop in market cap is just a natural and healthy discounting of that risk. If the plans work out, the stock price comes back.

    I’ll look forward to seeing your next post Vinnie.



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