"Maximizing Shareholder Value"​ is Killing Us. There's a Better Way.

During one of my MBA classes back in 2009, I remember being read the definition of a corporation: "A company's sole purpose is to maximize shareholder value". At the time this seemed perfectly logical to me. Why would an investor put capital into a company for any other aim? Money is allocated where it is best returned...and all that.

Since then I've learned a lot about allocating capital and investing in general. I can tell you that if you work for a company whose sole purpose is to 'maximize shareholder value' you work for a bankrupt company - they just don't know it yet.

The term "maximize shareholder value" was coined by economist Milton Friedman in a 1970 New York Times essay, in which he claimed "the social responsibility of a business is to increase its profits". He argued that a company has no social responsibility to the public or society; its only responsibility is to its shareholders.

Jack Welch took this concept and poured leaded gasoline all over it in the early 1980s when he taught freshly minted MBAs how to maximize shareholder value by using layoffs as a lever to increase and decrease profitability.

Ever since then, the unspoken promise between companies and employees has eroded to the point where employees now match the security provided by their employers - meaning nobody trusts anyone anymore in business.

This is why employees hate their employers, and are looking for new jobs at exceptionally high rates. And this is why "leaders" who seem bankrupt in morality make it to the top of morally bankrupt companies.

A company that "maximizes shareholder value" at the expense of everything else is a disgusting creature born out of capitalist greed that should never have been allowed to exist. These are the companies who will put profits over everything: people, customers, the environment, society, public health, innovation, inclusion, and so on. The worst behaviors of companies are tolerated because they are the most profitable.

I'll give you a few examples to consider.

Comcast is notorious for its draconian customer support and kafka-esque customer retention techniques. In 2014 a customer call went viral when the caller, who's wife had tried to cancel the service, spent 20+ minutes on the call explaining why they were cancelling the service. The rep refused to let them cancel; the only correct answer was to say 'nevermind, we will keep the service'.

Sprint notoriously fired about 1,000 customers who were calling with trouble tickets that hadn't been resolved, but "were resolved to Sprint's satisfaction", by waiving the termination fee and cancelling their contracts with the carrier.

Fidelity Investments will put lower-profit customers on exceedingly long hold times while providing a fast-track to customer support for higher profit customers.

And those are just examples of poor customer service. Let's talk about all of the layoffs that are happening around the tech industry for a moment. These large corporations over-hired in 2021, and are trimming staff in 2023.

Google just cut 12,000 people without so much as any human conversation; most found out they were let go when they couldn't log in or their badge didn't work. Some managers didn't even know their employees were let go until they couldn't contact them one morning. One Google engineer had been with the company for nearly 20 years and was let go by email.

How about those oil companies reporting record profits in 2022 and 2023? While petroleum products and gasoline have skyrocketed in cost to consumers, these companies are reporting north of $50B in profits. Good for shareholders? Sure! Good for society? That's a tougher sell.

Speaking of oil companies, how many times have we seen images of wildlife covered in crude?

How are companies like Marlboro still allowed to sell cancer-causing tobacco products that are dialed in to hook customers that ultimately suffer long-term health issues like lung cancer?

Oh - and speaking of health care...remember the "Pharma Bro" who capitalized on a trend (but wasn't alone) to buy a low-price drug and jack the price by thousands of percent, because they can? People die from Type-1 diabetes because they can't afford insulin. Ironically, the creators of insulin sold the patent for $1 because "insulin belongs to the world". Pharmaceutical companies have learned how to turn insulin into a pure profit engine - at the expense of human lives.

The behaviors that we tolerate from corporations - big and small - who maximize shareholder value over everything else are disgusting, depressing, and shameful.

B-Corps: The Real Purpose of Corporations

I believe that, for a company to be successful in the long term, there is a much more nuanced definition that involves a whole lot of stakeholders beyond just the shareholders.

A few years ago, a new concept began to build momentum around creating a more inclusive definition of the purpose of corporations. This concept is called the "B-Corporation". An alternative to the classic "C-Corporation", B-Corps live by what's called the "Triple Bottom Line".

The triple bottom line means that a company strives to achieve profitability in ways measured other than monetary gain. The three elements that are measured in a B-Corp are:

The people in this triple-bottom-line system are the myriad of stakeholders beyond just owners. Beneficial improvements in the lives of employees, customers, vendors, neighbors, suppliers, and even competitors are all considered in a well-built B-corp social responsibility tracking system.

The benefit to our planet is measured in carbon emission, pollution mitigation, sustainability in the supply chain, and so on.

And finally profit is what it is, but note that it's only considered after the first two points.

B-Corps can be wildly profitable - they are not a charity. Cotopaxi, Athleta, Coursera, Patagonia, Etsy, Ben & Jerry's, and Warby Parker are all examples of B-Corps who put people and planet on the same plane as profit - and all of them are doing wonders for each of their bottom lines.

Several startups who grow up in the Techstars environment convert to the B-corp model once exposed to its benefits to the world. And many investors will seek out companies with this mindset.

If you are considering where you might want to work next, or are considering building a new business from scratch, consider employing the triple bottom line in your analysis of what makes the company successful.

It'll take a ton of regulation and cultural shifts to convince the 1% financial elite to ever accept these types of frameworks in the largest, dirtiest, and most profitable corporations in the world, but we can all try to move that cultural needle along just a little bit.

Over the past 20 years, I have always liked to say that "I want to give back to the world more than I take, but I intend to take a lot". For me, that has changed a lot as my own understanding of business and social responsibility has evolved. I think a lot more about giving back than taking these days, and hope you will too as you consider your next step in your career.