End of the road for Shareholder Valuation based Business Models

Recent events around the massive oil spill in the gulf and a couple of interesting movies – Up In the Air by George Clooney and Capitalism a Love story by Michael Moore made it rather apparent that we are coming to an end of an era (in the way in which I was trained while studying MBA, and working for companies like Dell and Microsoft) on how business is done today.

The end of one business model that is flawed could perhaps be the start of a new way of doing business. The objective of this post is to share the findings of recent failures, the reasons why the shareholder valuation based business model era is coming to an end, while proposing an alternate business model that builds of the successes of the last era while shaping the future for the better.

Business models built around increasing shareholder value has come to an end:Fundamentally, most businesses today that are listed on any stock exchange or privately held across many directors exists to increasingly generate (or increase) shareholder value over time, along with other things – like impact on the environment, do good and so on. The distinction to be made is that this position of increasing share holder wealth is so ingrained in the psyche of most organisations that all other decisions are evaluated, risks managed and evaluated against this objective of maximising share holder wealth.

Let’s look at BP – while the positioning and logo symbolically represent the world’s largest solar company with environment friendly focus, their underlying goal quoted in many of internal writings of BP is:

"The responsibility of a corporation to deliver sustainable shareholder wealth is a GIVEN. That will never change, and must remain the fundamental driver of all business."

It is not my intention to single out BP, the other oil companies or the events to push for alternate oil fuel but rather highlight the decision making process a company goes through and how operating from this underlying premise of maximizing share holder wealth attributed to wrong decisions for BP.

• Managing risks as part of doing business: Risk management is the identification, assessmentand prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events.All companies, businesses and banks have a risk management process (usually teams) that lists of risks, asses a risk probability and works out a risk mitigation plan. BP did as well and in due course, the risk associated to deep sea drilling was low to near improbable.All the top oil executives when questioned on capital hill stated this as per multiple sources

  "The heads of four of the country's largest oil companies told a House panel Tuesday morning that the explosion of the Deepwater Horizon and subsequent oil disaster was merely a fluke"

  They went through the process of asking what any of the other companies would do differently, along with their risk mitigation plans. None of them had any constructive suggestions to cut off the leak, different from BP and interestingly their mitigation plans were near identical:

  "The plans cite identical response capabilities and tout identical ineffective equipment. In some cases, they use the exact same words."

  And many of them included making calls to an expert named Dr Peter Lutz, a professor of marine biology in Florida. Unfortunately he died in 2005, however he is part of the risk mitigation plans of BP and other leading companies with market caps in the billions as late as 2010 on show at Capital Hill. These risk mitigation plans were brought to the Hill while blaming BP for the reckless handling of the spill and risk mitigation done since.Turns out the risk mitigation plan was developed as part of contracted work to an external company.

  The questions you have to ask – if you could for a moment hypothetically represent BP or any of the other executive, with your compensation plan and reward scheme of working for the shareholders and the board – would you do anything differently?With the vast majority of retirement funds owning these blue cap stocks, what is the risk of losing shareholder value – a law suite (Surprised)?If you have gone through risk mitigation plans and disaster management, you know that handling such situations is rarely documented in enough detail in any plan – we rely on the heroics of the people to save lives, keep things moving forward.

  When an underlying operative is on maximizing shareholder wealth, risk mitigation plans can never be fool proof to handle disasters.This reality, though never publicly admitted, is the sad truth in most corporations (I am generalizing here).

• The difficult decision of paying victims of oil spill or aging pensioners: What is the price of a pelican, damage to the environment vs. payments that go to an aging pensioners in the world that have been told to invest in shares as a way of sustaining their lives after retirement? It took pressure and setup by Obama to get BP to setup a $20B reserve fund, cancel dividend payments-- a massive sacrifice under intense bullying by Obama to keep the Board and share holders to realize there are no other alternatives.

  

  The board has difficult times ahead being under the scrutiny of the US government, paying unknown liabilities for uncertain duration..Rest assured new assets will not be added to BP’s current entity any time soon under these circumstances.

  The question here is, which of the underlying revenue generating assets of BP can be moved to other entities (for a fair price for the time, of course) that give the board, thenthe shareholders the best possible return. Time and time again this is what happens – theft in daylight, justified by the premise of maximizing shareholder wealth. How this will get done in daylight under Obama’s watch is one worth keeping your eyes on and studying BPs future balance sheets. If all this isn’t disgusting enough, see how the corruption is so deep and all part of the capitalistic roots with the legacy of George Bush’s era Halliburton corporation benefiting in Iraq, Afghanistan and now the Gulf of Mexico.

• Choosing to manage the perceptions in the market place: Given the perception in and around the Gulf states of BP’s environment position, it is important for BP to impact the perceptions in the marketplace.While small businesses and victims are waiting for BP payments as per what was promised BP prioritized Google Adwords and media campaign to impact perceptions of the brand. What is more important to share holder value – a payment delayed by months to small businesses or brand perception that can be swayed by billboards or online advertising that impacts the masses that make decisions on where to buy gas, which stocks to invest on a periodic basis?

  The question you have to ask under the circumstances is, if maximizing shareholder wealth is the underlying imperative, what would you do different as CEO of BP, after landing in a long running oil spill scenario as the one that is today?

  If I were the CEO of BP and I set aside all my personal financial goals and if I were measured in terms of my ability to impact BP’s performance, regretfully I have to say that I would have to do the very same thing.When you look at the amount of heat and pressure that Tony Hayward is under, I feel sorry for the man who made a commitment with best intentions to increase safety standards at BP, under the pressures of shareholder value bound to do the best possible job, knowing that at some point he will be set aside by a Board of Directors, in the interest of share holder’s wealth.

  However, fortunately you and I have a choice – I have relinquished years of training at corporate environments of Dell, Microsoft and years of schooling with an MBA that prepared me to champion share holder value building business systems!

• Opinions of the people and Judge rulings on the spill: Once Obama realized the risk associated to deep sea drilling comes with this missing risk mitigation plan, he froze all further deep sea drilling projects. The reality is that this spill can take 2 years to shut down!!! I wonder if the Gulf of Mexico will turn to the Oil Well of Mexico by then and what that would do? However this act by Obama has pretty much backfired in the region, on the premise that further stop drilling would devastate lives in the region. So much so that a judge in the local courts ruled that this ban on deep sea drilling by Obama was illegal, only later to be brought forward that this Judge has significant investments in oil industry!The lives of all the people are bound by share holder value model – either of BP or another company.How can we look at environment or relationships of other sort when bound by this shareholder value model?While some may say this is greed, and perhaps rightly so, what about those who have been trained for 18 years and have years of business experience to operate with this underlying imperative?

• Is this Oil spill an act of God?When all efforts and roads you take don’t lead you to your objective, blame God. There is an exception clause for damages caused by acts of God, like Katrina. These have different payouts and get the masses helping each other.If oil spill is 'an act of God,' BP merits divine retribution.According to Don Young, a US Senator, he states:

  "This is not an environmental disaster, and I will say that again and again because it is a national phenomenon. Oil has seeped into this ocean for centuries, will continue to do it. During World War II there was over 10 million barrels of oil spilt from ships, and no natural catastrophe. ... We will lose some birds, we will lose some fixed sealife, but overall it will recover."

  I wonder if 60,000 barrels keeping pumpingout of this oil well for 2 years, will sealife or bird exist?

  More than 1,400 former members of Congress, staffers and federal employees registered as lobbyists in the financial services sector alone since the start of 2009, according to a study by Public Citizens and the Center for Responsive Politics.

  I can understand the average person saying this isn’t something I would do, however regretfully I have had to do varying campaigns at different levels in my prior employment at Dell, Microsoft and Pacific Brands. The issues were different, ranging from:

  • Amount of time my team and personal energy team members invest
  • Fixing the clock out at 5pm for exempt employees (most employees are)
  • Perceptions of open source as a perceived competition at Microsoft
  • Late evening Pizza dinners away from the families, table tennis, bean bags and Xbox parties to entertain the team at work longer to get your corporate objectives accomplished?

  If you have worked in a corporation, or employed a manager while driving a corporation toward shareholder value, haven’t you asked of your employees more based on what you were asked to do? After all many on the team I managed were near millionaires or more, with vested and unvested shares based on then valuation at Dell and Microsoft. Regretfully many on the high profile teams that gave input on development of Microsoft SQL 2007 and such high end technologies are suffering from higher than average divorce rates – I wonder why that is?

I hope this shareholder valuation based business model can come to the end, or for those who are in a position to make such calls.Then the next question is, how or on what basis do you operate a business from/for?

Maximize relationships across the board for companies:Recall how in mathematics we had to optimize equations for one variable and once you mastered that,you were introduced tomulti variable optimization?Imagine, if rather than having shareholder wealth as the primary objective, the objective of businesses were to optimize the relationships it enters or impacts. By relationships a business enters, this refers to its employees, customers, contractors, suppliers, distributors the environment – every relationship and interaction the business engages.

Most companies in this day and age, have optimized for the customers as this is directly tied to revenue and share holder wealth, usually at the expense of their employees, contractors, distributors or the environment. Balancing all of these may not be easy, however from a business maturity standpoint we have enough reference for single variable optimization that we can move to multi variable optimization.However, before you are convinced that we need to move to maximizing relationships across the board, let’s look at the current state of the practices of the business leaders:

• BP – Let me just set this aside for now, as the media and public has crucified this company.

• Dell – My MBA text book example company where I worked for 7 years pioneered the online reverse auctions. Here is a good summary of how reverse auctions impacts relationships:

• "Jap suggests that online reverse auctions should not be relied on as a dominant form of negotiation in the sourcing of direct materials because of their potential negative impact on the buyer-supplier relationship."

  "You want to use them in situations where relationships aren’t important or if you do use them, use them sparingly, realizing that over time suppliers can’t continue to offer the same level of cost savings."

  What most people don’t realize is that the whole manufacturing process of Dell with all of these tactics produces, manufacturing costs provides a average profit of $100 or less for an average computer that costs $2,500. This is not where Dell makes its money. The wealth of Dell comes from the in cash turnover of pre-pay on credit card to payments to suppliers, which on average daily basis was upwards of $4B daily. So don’t expect computers to get to you any sooner than 14 days or suppliers to be paid any sooner than 30-60 day terms. For all Michael Dell cares, he could be shipping eggs to customer as long as there is a floating amount between payments received up front and time to pay suppliers – Dell has a business. Whether this is good for customers or suppliers is not relevant, though customer satisfaction is measured and actioned in its ability to serve the greater shareholder wealth, of which my team and I had significant shares.

• Apple – How about this flagship innovation leader that has given us iPhones and iPads, that is a must have toy? I have one as well, that I think is a significant break through over the Blackberry that I used to use. Then I came to know of how the company where they are made has the highest number of suicides in China.

  Despite such impressive credentials, until recently Foxconn was a quiet giant -until 10 workers killed themselves and another three attempted suicide, all over a dispute about wages.

  Not to worry about all this bad publicity, Foxconn is getting trained counsellors to assist, while they have also got a liability waiver for deaths that occur in writing (required to work at Foxconn), while what the factory workers were asking for was more money.

  Here is another interesting fact:

  They work up to 12 hours a day, six days a week, assembling products that most cannot afford to buy themselves: Apple iPhones, Dell computers and Nokia mobiles.

  I guess one can stick to the excuse of “we don’t have slavery here as we cannot see any of this”..a Chinese in US or any of the western world is different from a Chinese in China?Slavery out of sight is OK?If they are crying, give them another drop of water – while we preserve this model of shareholder wealth.

  Well then we have these lines that are so long and servers that keep crashing because the demand for these latest ipads and iphones are so long..what if Apple really wanted to solve this for their interested customers?To create these lines and perceptions which help marketing, they keep their resellers in the cold.

  From maximizing share holder wealth, customer loyalty and perception, Apple at this point is doing a good job – or are they?The love I had for my iPhone started to disappear soon after I read about all this, only to find Apple is one of the better companies is this day and age, and this is the best they can do – enslave the Chinese in China, lock out resellers to create perceptions of long wait times?Is this the best we really can do in business relationships?

Relationship optimization has to occur at all levels beyond the people that are in ourvisible proximity – our employees and/or customers. Employees of subcontracted companies exist due to relationships we enter with subcontracting companies. Who is to say that the environment damage at the levels that are happening in the Gulf are any worse than the slavery and robbery from resellers that occurs at the flagship company of innovation?

If you are not yet convinced that all this shareholder maximization world is coming to an end, read what Warren Buffet is doing with his wealth, asking of others as he is coming to the end of his road and has realized that being the richest person on the planet means nothing and he will be going to a grave the same size as yours.

For those who are heavily invested in the stock market and sense panic and fear from what is about to happen, understand that most of these events that are happening today have been foretold by HS Dent in the book, The Great Depression Ahead. While the world markets struggle with sovereign debt levels, astute investors are moving their wealth to gold as this is the historical currency replacer in uncertain times.

There is one small problem with this, in that the civilization is advancing at slow but amazing pace and I wonder on this supply-demand economics model, would this masses of gold be tradable for anything usable in the coming era?Will it be tradable for food or an ipad? My guess is that this will be the last and final bubble burst with gold being worthless at that time, one can be buried in a fully gold plated grave!

I’d like to believe that the readers of this blog would choose to let the dead rot in the gold plated graves, while the living ones focus on maximizing all relationships we enter into in business, end slavery of the people around the world and do better for the environment than the model we are in today of shareholder wealth, that has died and isn’t going to heaven.