Corporate finance - Financial Management Collection

Financial Management (Financial Management Association), Fall, 1993 by Melissa Lunt, Ted Veit

But if you think about what I call "wealth creation"--which is to me a much more interesting question--then I would argue that NEC has put itself into a strategic position with much greater potential than GTE's. NEC, which started off with a much smaller endowment of capabilities and technologies and financial resources than GTE, has been creating a very different kind of wealth over the last ten years. It has achieved global leadership and significant market share in all the major C&C industries. What has GTE done during the same period? Today, they're pretty much back into the telephone operations they started with.

STEWART: Yes, but is that necessarily a bad thing? It seems, judging from GTE's stock price performance in recent years, that the market is applauding their earlier diversification attempts.

PRAHALAD: Almost all the debate in the United States centers around stockholders and stockholders' returns. It seems to me an unexamined article of faith, and I'm not at all convinced that it's the only question to ask. I would prefer to put the issue of corporate success in different terms: How well has a company succeeded in creating wealth not only for shareholders, but for its customers and for its employees? Certainly shareholder interests must be served in the process. But, I believe that management's failure to consider customers, employees, and other corporate stakeholders will inevitably lead to the reduction of shareholder wealth over the long term.

In the short term, of course, management can make money simply by buying and selling companies, by functioning as opportunists moving in and out of industries at will. American managers have shown themselves to be very adept at that. But I would like to see the managements of our large companies show greater concern for long-term wealth creation. Over the long term, you cannot short-change your customers and your employees and still create value. You must create a satisfying workplace--one that provides opportunities for people to grow.

So, I'm concerned ultimately about the continuity of large corporations--and I believe my view is shared by most societies around the world. For companies that want to survive for 50 or 100 or 200 hundred years, continuity requires a balanced view of wealth creation. If you're concerned solely with shareholders' returns, you'll never make any long-term investments in employees or in customer relations.

So, again, the fundamental issue here is coming up with the proper scorecard for evaluating top management. I'm convinced that, within the next five or ten years, there's going to be a lot of debate in this country on whether we should continue to worship only at the altar of stockholders. Is there more to running large industrial enterprises than just attending to stockholders? Is it not indeed a position of public trust?

Beyond Shareholder Value

STEWART: Would anyone on the panel care to respond to C.K.?

WILLIAMS: I think all three groups--employees, customers, and stockholders--are critical to corporate success. But if you want to raise capital for investment in the future, you really have to satisfy the shareholders with a reasonable return. And I frankly have yet to see a business where you can satisfy shareholders without taking care of customers and employees. So I don't see the problem.