Shareholder primacy as a management principle is without basis in law and has neither benefited shareholders nor society at large. Such is Steven Pearlstein's argument in last week's Washington Post column, "How the cult of shareholder value wrecked American business." Pearlstein posits that the relentless drive to meet quarterly expectations erodes incentives for firms to "do the right thing." Options that bolster firms' long-term health -- including investments in workers -- become secondary as a result.
All good points to consider -- but here's the rub: With over 6 million firms in the U.S., only 4,600 are publicly traded. A disproportionate emphasis on publicly traded firms distorts our view of what is actually happening in the economy. While publicly traded firms are under the greatest pressure to demonstrate quarterly gains, some do resist. Moreover, the other 5.9 million private companies often behave differently. Many can and do take a longer-term approach to business value. They present an array of management and organizational strategies that are testimony to the resilience and ingenuity of American business. These private companies are responsible for over 2/3rds of all jobs in the U.S.
Why then do we overlook the lion's share of our economy when we talk about business? Just as the federal government is not all government, public firms are not all firms. As Justice Brandeis observed that states can serve as laboratories of democracy, so too can private companies be the laboratories of capitalism.
On September 6, The Hitachi Foundation experienced the diversity of experimentation. We joined over 400 firms for the largest open book management conference in the country. The Great Game of Business, an organization in St. Louis, promotes Open-Book Management, an approach in which all workers have a voice in how the company is run and a stake in the financial outcome. Open-Book Management requires significant investments in training and management that can produce tremendous returns. Springfield ReManufacturing Center, which invented Open-Book Management, has seen its stock price increase over 1,000 percent in the past three decades, and its revenues rise from $16 million to over $400 million. Open-Book practices have also proven effective for both small and large firms, including Whole Foods Market and Starbucks.
Earlier this month, we released Doing Well and Doing Good, a new report chronicling firms that have succeed by integrating product, process, and workforce innovations. Just last week we hosted the finalists contending for our Yoshiyama Young Entrepreneurs award. These companies ranged from Anjna Patient Education (battling chronic disease with cell phone technology) to Symbiotic Aquaponic (growing fresh vegetables and fish in water scarce rural Oklahoma).
Business leaders in industries as varied as farming, auto parts, clinics and convenience stores are experimenting with management structures and business models that paint a more nuanced and even hopeful portrait. These laboratories are sources of innovation that should not be overlooked. If short-termism is a wrecking ball, these may provide the building blocks for the 21st century alternative.
This blog post reflects the views of the author and does not necessarily reflect the views or opinions of the Foundation Board, Hitachi, Ltd., Hitachi America, Ltd., or any Hitachi company affiliate.