In mid-2015 Woolworths was the poster child for a board and executive that forgot managing a company is about more than shareholder returns. Today that moniker belongs to QANTAS. To quote Joe Aston – a fierce critic of QANTAS and more specifically, Allan Joyce – and Ayesha de Kretser in the Financial Review (Saturday 9 Sept):
“New CEO Vanessa Hudson takes over an airline that makes more money than ever but is the most hated brand in the country.”
It is no small feat to go from one of Australia’s most iconic brands to most hated. How did it get to this? To borrow from Hemingway: slowly, and then quickly. But it gave me a reason dust off and refresh a blog from the archives.
What does the Woolworths experience teach us?
Woolworths held their margins too high for too long, prioritising shareholders over customers. And customers voted with their feet – and their wallet. Woolworths share price dropped 30% over 12 months [40% over 24 months] from its mid-2015 peak. Commentators expected it would take at least 2 years to recover a reasonable sales growth trajectory.
In February 2016 Woolworths’ new CEO announced his first priority was ‘to focus our team on customers’. Woolworths reduced prices 3.8% in Q4 2016 [1]. This had immediate effect, with their customer satisfaction jumping from sub 70% to 75% in the final quarter of FY2016. Woolworths share price recovered by October 2019. This was also the time of the Masters debacle (see here for that story) so there were confounding factors.
The primacy of shareholder value is much loved by many, and the implications of not delivering on shareholder value are ever present. The market can be pretty harsh when the returns are not ‘satisfactory’.
But near-term shareholder returns are no proxy for organisational health and long-term value. Many highly respected business leaders argue against the cult of shareholder value. Counter-intuitively, Rosabeth Moss Kanter has argued:
“The companies that are most successful at maximising shareholder value over time are those that aim toward goals other than maximising shareholder value”
In 2010 Roger Martin, the Dean of the Rotman School of Management argued that maximising shareholder value “is a tragically flawed premise, and it’s time we abandoned it … and made the shift to customer capitalism”.
Peter Drucker argued that “the sole purpose of business is to attract and retain customers”. While most executives believe the ‘accepted wisdom’ in the US is that businesses are obliged to maximise shareholder value, when asked their own views the highest rated corporate purpose was ‘to serve customers interests’.[2] It’s not that Drucker et al. imagined companies did not need to make money. Failure to make an economic return is ultimately fatal. But your economic model will fail without customers valuing what you offer – and feeling valued.
What about the talent equation? Investments include both financial and ‘human capital’ (our talent). Financial capital without talent is just money. Just as the financial investors expect a reasonable return, so too, our human capital should expect a reasonable return on their investment.
If you see people as simply an instrumental input to ‘production’ then you limit what’s possible. This is the fundamental difference between transactional leadership – which produces what you contract for – and transformational leadership – which produces more than you expected.
Some very successful CEO’s actually live by this principle:
§ Business has to give people enriching, rewarding lives, or it’s simply not worth doing … Richard Branson
§ You have to treat your employees like your customers … Herb Kelleher (CEO Southwest Airlines)
Thus, businesses compete in three markets[3]: capital; customers; and talent. Arguing which of these three stakeholders has ‘primacy’ misses the point: to succeed, a business must succeed in all three markets.
In an ideal world, these stakeholders sit in a state of constructive dissatisfaction. Shareholders seeking more profit; customers more value; employees a better deal. It is constructive dissatisfaction because it is this tension between ‘what is’ and ‘what could be’ that is the animating force of change.
Is it too glib to suggest that a business can manage this system so that these forces are not in a state of tension? Wouldn’t that be the equivalent of having zero debt on the balance sheet: a lazy balance sheet? Nothing more being demanded by anyone? This is arguably a recipe for failure as much as getting the balance wrong.
For too long now QANTAS has given primacy to shareholders over customers and employees. Fill in your own QANTAS horror story. Accountability for this sits as much with the board as it does with the executive. Watch this space.
What are the lessons for your business?
Create space for an open conversation in the board room and within the executive team. Is there a felt level of ‘constructive dissatisfaction’? What measures might suggest the tension system is out of balance? Do you allow – invite in – conversations that challenge the current balance? Do you listen to outside voices?
… the unfashionable strategist
PS: check out The Fin podcast: ‘The real story behind Qantas’ rapid descent – and what’s next’.
[1] Excluding tobacco
[2] Unpacking Corporate Purpose. A report on the beliefs of executives, investors and scholars (2014). www.aspeninstitute.org/UnpackCorporatePurpose
[3] You could make an argument that the model should include suppliers, and potentially broader stakeholders, but that’s for another blog.
