We live in an age of competing economic narratives. President Biden tells the story that a $1.9 trillion stimulus bill will help the economy, while Republicans tell the story that the bill is too big and will cause inflation. As the Nobel-prize winning economist, Robert Shiller, points out his wonderful book, Narrative Economics (Yale, 2019), mega-narratives drive public discourse and our lives. Nowhere is this more true than in management, which for the last hundred years has been driven by competing mega-narratives.
The Mega-Narrative Of Maximizing Shareholder Value
For most of the last fifty years, big corporations were driven by the mega-narrative that maximizing shareholder value would not only make corporations more prosperous. It would also create optimal economic benefits for workers, customers and society at large. This mega-narrative was not based on facts, statistics or serious economic reasoning.
It was a fabulous narrative concocted by a trio of academic economists, Milton Friedman, Michael Jensen and William Meckling, back in the 1970s. It began with an Friedman’s inflammatory article in the New York Times in 1970, “The Social Responsibility Of Business Is to Increase Its Profits”. It was supported by the tortured reasoning of the famous, but unread, article by Jensen and Meckling in 1976, “Theory of the Firm”.
The narrative gathered further steam with Jensen’s 1990 article in Harvard Business Review, which put forward the fantasy that if executives would lavish themselves with stock options to ensure a tight focus on shareholder value, they themselves would change from being bureaucrats to become bold entrepreneurs. Executives were happy to oblige by giving themselves the stock options, although no explosion of entrepreneurship has been visible. In effect, the floodgates of executive compensation opened. Maximizing shareholder value became the official gospel of American business with the formal pronouncement of the Business Roundtable (BRT) in 1997.
In the first two decades of the 21st century, the mega-narrative of shareholder value became the driving force in American business. Yet it also received increasingly severe critiques, as reality intruded into fantasy of supposedly optimal societal benefits flowing from the embrace of that narrative. Even ifs one-time hero, former GE CEO, Jack Welch, called “the dumbest idea in the world.”
Evidence increasingly showed that the narrative of maximizing shareholder value was leading to growing inequality, rampant short-termism, and—paradoxically—the loss of long-term shareholder value. The shift of productivity gains away from workers to shareholders after 1970, as shown above in Figure 1, was particularly striking.
Finally, in August 2019, big-business CEOs could no longer take the political heat. Shareholder value was renounced by the CEOs of more than 200 of the largest corporations who signed a new formal declaration of the BRT. The new declaration foreshadowed a supposed return to an older mega-narrative stakeholder capitalism—an approach that had already been tried and discredited in the mid-20th century.
In the period since the 2019 declaration was issued, research by Harvard Law Professor Lucian Bebchuk and his colleagues have been unable to detect evidence of any significant change in corporate behavior. Few of the signatory CEOs obtained the approval of their boards to sign the announcement. Bebchuk concludes that shareholder value remains the guiding narrative for most big business. In effect, the declaration was done “mostly for show.” Shareholder value is still the dominant mega-narrative of American business.
The Mega-Narrative Of Stakeholder Capitalism
The 2019 declaration of the Business Roundtable foreshadowed a supposed return to stakeholder capitalism—an approach that had been tried in the mid-20th century.
This mega-narrative of stakeholder capitalism was launched in 1932, by Adolf A. Berle and Gardiner C. Means in their treatise, The Modern Corporation and Private Property. It proposed that firms should have professional managers who would act as trustees and would balance the needs of “the owners, the workers, the consumers, and the State,” case by case. This would lead to the best rational allocation of resources.
Stakeholder capitalism sounded good in theory. But there was just one problem. It didn’t work. It led to what management theorists came to call “garbage can organizations.” These were organizations that couldn’t make up their minds. Goals wandered in and out of meetings. Decisions happened randomly, depending on who was present. The organization often had no clear preferences or guidelines. It frequently operated on the basis of inconsistent and ill-defined preferences, goals, and identities.
Indeed, it was the shortcomings of stakeholder capitalism that prompted the emergence of the mega-narrative of shareholder value. It is hardly plausible that big business will now revert to this discredited narrative, except for public relations purpose—in effect, just “for show.”
The Mega-Narrative Of Customer Value
Meanwhile, the most valuable and fastest growing firms are paving the way for acceptance of a radically different mega-narrative: customer-driven capitalism. This was foreshadowed by Peter Drucker in 1954 with his declaration that “there is only one valid purpose of a corporation: to create a customer.”
For many years, Drucker’s dictum was ignored. But in the current digital age, in which power in the market place has shifted to the customer, an obsession with delivering value to customers is proving to be the key driving force behind the success of firms like Amazon, Apple, Google, Facebook, Microsoft, Spotify, Tesla, and Zoom. A Copernican revolution in management is under way. These firms are showering benefits on us as customers and users and have already transformed almost everything that we do—how we work, play, shop, access knowledge, learn, entertain ourselves, communicate, move about, stay healthy and even how we worship. The winning firms have become extraordinarily rich in the process.
Other firms are not blind to the riches being heaped on these winners. As a result, they too are pouring money into the new technology with digital initiatives and Agile transformations. Armies of consultants have been happy to train large numbers of staff on the new digital management practices. Yet without deeper change in obsolete 20th century mindsets still in the grip of the mega-narrative of maximizing shareholder value, those practices are unlikely to generate much benefit. Success in the digital age requires a 21st century mindset based on an obsession with delivering value to customers.
The 20th century mindset, built on the goal of maximizing shareholder value, is still prevalent in many large corporations, along with all the attendant principles and processes that follow from it—bureaucracy, vertical hierarchy, autocratic leadership, backward looking strategy, sales and marketing focused on short-term profit, and control oriented HR. Corporations run in this fashion cannot adapt fast enough to cope with the turbulent digital marketplace.
Defeating A Dominant Mega-Narrative
Human beings think in stories, understand the world through stories, make plans and decisions in stories and organize their lives in stories. Although stories drive our decisions about how and where to invest, how much to spend and save, and help propel major economic events and policies, management thinkers, like economists, have systematically neglected the role of narrative. Shiller is leading the change in economics. It is time to make the same change in management.
Shiller’s book shows how tools like focus groups and new tools like textual analysis of social media can shed fresh light on what is occurring in the economy, to supplement the standard economic tool-set. For his statistically minded brethren, he also shows how economists might go about tracking and measuring narratives in a reassuringly rigorous and quantitative fashion.
Even more important is to learn how to change the dominant mega-narrative, when it has gotten out of sync with reality. The challenge in management today is significant, especially because executives are being generously compensated to espouse the failed narrative of shareholder value. As Upton Sinclair pointed out many years ago, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
We know what doesn’t work: arguments based on facts will not only fail to change deeply embedded narratives. As a result of the confirmation bias, people not only ignore facts that challenge their basic beliefs: contrary facts will often strengthen their existing belief, thus making change even more difficult.
What can work are narratives that communicate a different and positive narrative future for the listener. If managers can understand and live the narrative of customer value, in which they and their firm will have a more prosperous future, then there is a chance that they will start to embrace that different future.
Wholesale change may ultimately need regulatory action, particularly when stock options are combined with share buybacks. Such practices used to be considered illegal as they constituted obvious stock price manipulation and self-dealing by executives. These practices were effectively legalized in 1982 by a hard-to-understand SEC regulation: rule 10b-18. As a result, executives of public corporations, rather than creating fresh value and new customers through entrepreneurship and innovation, began extracting value for shareholders (and themselves) by buying back their own shares. As a result, it is has been “raining share-buybacks on Wall Street.” The Economist called the phenomenon “an addiction to corporate cocaine.” Reuters called it “self-cannibalization.” The Financial Times called it “an overwhelming conflict of interest.” The U.S. Senate may once again need to look into this egregious practice.
In this context, important work has been done of Carlota Perez in her path-breaking book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (2002) in which she identifies even larger economic “mega-narratives”, which help determine which economic narratives rise and which fall at any particular time. These mega-narratives can help forecast which particular economic narrative becomes dominant at any particular stage in the larger economic cycle.
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