Today (at the base of this email) sharing a recent post from Seth Godin that absolutely aligns with my thinking on the purpose of the corporation. For more, see my post linked to the image above, a model designed to create alignment between shareholders and other stakeholders.
Now, Milton Friedman (as I note in my post) said around fifty years ago: “the sole purpose of the corporation is to enrich the shareholders”. This dogma is directly responsible for so much of the inequity and inequality in our world, which therefore links to the type of polarised world of politics and opinions we now live in.
So, as I put in the title, choose your shareholders wisely. In other words, make sure they are aligned with you.
Some examples:
- Timing: If you are a start-up or early-stage founder seeking capital, if you are building to sell in a few short years, then sure, go with VC or PE funding, as they want their shares cashed out (at a high return) within that short time frame. If, however
- Income or Equity: I have seen examples of listed companies with some very conservative institutional shareholders who are focussed on regular dividends, whilst other institutional shareholders of the same company want them to chase rapid growth. Contradictory goals, as one requires paying out profits, the other reinvesting them for growth. Lack of alignment among the shareholders
- Purpose: Imagine you want to change the company to move away from (say) extractive industries into sustainable ones (eg the power industry). Not only is this inevitable, but over time will be far more profitable (we already see sustainable power companies with very high share prices), yet if shareholders aren’t driven by both profits (and longer term returns) AND being better for the planet, then again lack of alignment.
With large public companies we see these types of alignment issues all the time (eg Unilever does a great job of following purpose, yet at the same time there is a “push:pull” with shareholders expecting returns in the short term too. Their past CEO, Paul Polman, clearly was impacted by this alignment struggle, and at the same time I am happy to see that current CEO (and fellow Scot) Alan Jope, is absolutely committed to Unilever being purpose-driven.
Now, if we take it down to privately held companies of any size, small or large, do choose your shareholders wisely. In addition to looking at purpose, type of investment return required, timing of returns etc, for smaller companies what else can they offer you to help your business. Could they be a trusted advisor that supports you as you lead and grow your business? Being an Owner/CEO/Founder is “lonely at the top”, it is amazingly valuable to have people that support you.
You can have that type of support from retaining someone at a fee to provide this (as my clients often do with me, for example). You can also bring in outside investors who insist on appointing a non-executive director, but be careful around their motivation. Is that person there primarily to safeguard their investment on their terms, or are they energised and aligned to help you and the business succeed on your terms, your purpose, your vision, your timings?
A closing thought that may resonate for some owners/founders/CEOs here is that, if the alignment is there, I love to come in to a role with a company where instead of simply paying me a monthly retainer, they bring me in as an investor and a trusted advisor at the same time. This can look like a three-pronged way to align:
- A monthly retainer is still paid for consistency, but at a much lower rate than if that is the only compensation
- I invest a small amount in the business at the start of the relationship, this gives me “skin in the game” from the outset. Oh, and though it may seem odd at first to the client, my investment funds them then paying my monthly retainer for some time 😉
- The third piece is that the company then, again from the outset, grants me equity (in addition to that I have paid for in point 2) in the business reflective of my long term commitment to their growth and success, as well as the value I will add to that as their trusted advisor and sounding board
Alignment of shareholders is something I’ve done work on many times for clients and as an investor, this three-pronged model is one I’ve developed over time and love to find clients that understand and choose it. I’ve never published this before, so, as always here, this blog is about sharing learnings. Perhaps this may work for you with me, and perhaps completely separately it may spark an idea for you around how you may choose your shareholders wisely.
PS I only work with purpose-led leaders and companies, so let’s put that out there around alignment too 😉
Over now to the maestro, Seth:
Public companies are too often out of alignment
The public markets can offer a company quite a bit: Cash right now. Liquidity for the future. A currency to help recruiting and retention.
And public companies come with a giant caveat: They are owned by people (the shareholders) who might sell out at any moment. And new ones can take their place in an instant.
This flexible ownership is part of the attraction of the stock market, but it also means that you can’t count on the people and institutions that own your organization taking a long-term view. (Long-term for them might even be a week in the future).
As a result, the others that the organization seeks to serve: The environment, their customers, the employees, the culture… often lose out. Because thanks to Milton Friedman’s mythology, the primacy of the shareholder (the one who drives the stock price, the very stock price that drives management) means that every time these companies seek to serve one of their other constituents, they have to do a sort of dance, explaining to shareholders why, after all, really and truly, what they’re actually doing is serving the shareholders. Not just serving them, serving them right now.
And, thanks to the short-term interests of many people who trade stocks, there’s pressure to own shares that go up the most today, not a company you’re proud to own for the long run.
Sometimes, the enlightened and powerful leadership of a company is able to ignore the whining of the shareholders. If you don’t like where this bus is going, sell!
But over time, that resolve often fades. I saw this first hand at Yahoo. When everyone who works for you and around you is watching the stock price, it’s hard to decide to do the right thing.
If you want to run an organization you’re proud of, choose your ownership as carefully as you choose your employees.
(c) Seth Godin 23 March 2021