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Why Shareholders and Customers Come First While Employees Get the Shaft

Corporate AmericaThe key constituents of any company are its customers, its employees, and its shareholders. That much we know. Nevertheless, the question of corporate priorities - which should come first, second, and last - is one of those ageless debates that keeps coming up again and again. I think the answer's pretty straightforward, but I don't think you're going to like it.

You see, readers often comment that, in a healthy, successful corporation, the needs and satisfaction of those constituents should be aligned. With all due respect to the wisdom of the masses, that viewpoint reflects a naive, Utopian view of the business world that, simply put, is virtually impossible to achieve these days.

The reason is simple. The set of conditions required for those three stakeholders to be simultaneously served is extremely narrow. For example, if there's no competition, infinite demand, no infrastructure or material supply issues, and the company develops one great product after another that customers increasingly show up to buy, well, the company grows, profits remain stable, everyone's happy.

But that's not the way it works in the real world. In the real world there's competition, issues, and stresses that necessitate tradeoffs, and that's when the needs of the constituents begin to diverge. For example, I give you the case of Hewlett Packard. On the one hand, recently ousted CEO Mark Hurd was widely credited with one of the more dramatic turnarounds in modern history. Investors loved Hurd because he delivered results.

From fiscal year 2005, when Hurd became CEO, to fiscal year 2009, HP's revenues grew from $86 to $114 billion while net income exploded from $2.4 to $7.6 billion. As a result, over the five year period from Hurd's hire to the present, HP's share price significantly outperformed key competitors and market indices with a compound annual growth rate (CAGR) of 14% compared with IBM (8%), the Nasdaq (2%), and the S&P 500 (flat). Dell, of course, plummeted during that time. During the five and ten year periods preceding Hurd's tenure, HP significantly underperformed all the above.
So, it's no wonder that investors loved Hurd. Now, let's contrast that with employee morale and satisfaction. Now that he's gone, everyone's coming out of the woodwork with all kinds of stories and data that would seem to indicate that Mark Hurd was was anything but loved at HP. According to Chuck House of Stanford University:
This guy was a thug, nicknamed Mark Turd by ex-HPites who worked directly for him -- stories that have circulated in the Valley for three years. He raped HP employees (figuratively, without violating the sexual conduct code at HP) by eliminating the sixty-five year concept of profit sharing, preferring to move to obscene bonuses for himself and his five top minions -- a mere $113 million payout for them in a year he chopped everyone else's pay by 5% plus profit-sharing. These were raises for some of the five people by as much as 400% -- a tidy uptick.

He was profane, a bully, autocratic, threatening, demeaning, vindictive, and rude. Blogs over the weekend by current employees said "Hooray, the tyrant is gone!" I couldn't contain my glee on the 11pm news -- best news for HP in a very long time!

As for customer satisfaction during Hurd's tenure, I have no data on that but I'm not aware of there being a major shift one way or the other.

Now, astute readers might ask, why not have moderate growth and profitability goals while maintaining good employee satisfaction, i.e. what's so terrible about $86 billion in sales and $2.4 billion in profits?

Well, there are a few problems with that argument. In relatively stable, noncompetitive, and slow-changing markets, maintaining a specific operating point like that is indeed achievable. We used to think of industries like steel and automotive that way, until foreign competition changed the equation and you know what followed. As for hyper-competitive technology markets, forget about it. In practical terms, it's difficult to achieve and getting tougher all the time.

These days, in most major markets that employ BNET readers, companies really have to be very clear about their priorities and goals. And while I absolutely don't think employees need to be trashed for companies to be competitive, I do believe that shareholder value is and should be the primary goal. To meet that goal, leaders employ business strategies to drive business metrics like customer satisfaction, market share, and profit margins. And while employee satisfaction absolutely cannot and should not be far behind, it does, nevertheless, come in third, especially when push comes to shove.

That's my opinion. What do you think?

Image Courtesy CC 2.0 via Flickr user Zevotron

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