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"Shareholders Aren’t Everything"

Interview with John Kay, Director designate of Oxford University’s School of Management Studies.

In Fortune, February 17, 1987, p. 133-4.

While nothing you read on this page is likely to change your mind, perhaps you will enjoy the issues.

Those of us interested in operations research and in corporate decision policy often agonize over the issue: What is to be optimized in business decision making? It is a matter of, "What is the objective?," and having a way to measure value in the context of the objective(s).

In this interview article, Professor Kay argues that managers need to balance all stakeholders’ interests. He claims it is "bizarre" to say that stockholders own other than purely physical assets. A company’s purpose is "producing goods and services people want. Business is about providing employment, providing value for customers, for developing skills of employees, for developing capabilities of suppliers—as well as earning money for shareholders."

The interview provides mostly lucid arguments both ways. Although Kay clearly favors a balanced stakeholder treatment, he includes the counter-argument: "Why should managers give priority to shareholders' interests? The most compelling answer I hear is that it's because the shareholders own the business." This position, contrary to his thinking, sounds good to me.

Persons generally argue that a successful business creates value. Further, most would agree that a necessary condition is a win-win sharing between shareholders, employees, customers and other stakeholders. From an optimization viewpoint, then, what is to be maximized? Product or service quality, employee wages, and corporate altruism can always be increased at the expense of the stockholders. Recognizing stockholder ownership seems the only legitimate and credible approach. A coincidence, happily for all concerned, is that treating stakeholders fairly seems to be a necessary strategy in maximizing stockholders interests (i.e., maximizing present value or expected monetary value).

Built to Last

by James C. Collins and Jerry I. Porras, 1997, HarperCollins, now in paperback, 342 pages (first in hardback, 1994).

The authors, with help from lots of researchers at Stanford University, studied visionary corporations. "Visionary companies are premier institutions—the crown jewels—in their industries, widely admired by their peers and having a long track record of making a significant impact on the world around them."

The dominant theme in the book is that great, enduring companies come about only by deliberately pursuing a purpose beyond pure profit. The visionary companies: