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The tyranny of numbers

The long-term interests of a company are often sacrificed in the obsession to maximise returns to its shareholders

STR Team  |  New Delhi 

The era of "Jack Welch capitalism" may be drawing to a close,' predicted Richard Lambert, the head of the Confederation of British Industry (CBI), in a speech early 2010. The word 'capitalism' acquired the 'Jack Welch' tag because, while running General Electric, he was considered the embodiment of the idea that a company's 'sole aim should be maximising returns to its shareholders'. In Mr Lambert's view, 'If you concentrate on maximising value to shareholders over the short term, you put at risk the relationships that will determine your longer-term success.'

Inspired by an article published by economists Michael Jensen and William Meckling, fixation with the idea of 'shareholder value' began in 1976 and gained considerable momentum over the years. It was after the global financial crisis (starting late 2007) that this fast-spreading 'wisdom' was brought into question. The debate whether firms should focus most on their shareholders, their customers or their workers was revived once again. In an interview in March 2009, even Jack Welch said, 'On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy... your main constituencies are your employees, your customers and your products.'

Roger Martin, Dean of Rotman School of Management, argues, in an article he wrote in the January 2010 issue of Harvard Business that shareholder value should give way to customer-driven capitalism' in which firms should, instead, aim to maximise customer satisfaction'. In the recent past, Paul Polman, CEO, Unilever was quoted to have said to the Financial Times: 'I do not work for the shareholder, to be honest; I work for the consumer, the customer. It is not as if maximising employee and customer satisfaction and at the same time enhancing share­holder value are mutually exclusive. In fact, taking a long-term view, sharper focus on other stakeholders' interest is one major reason for increased shareholders' value.

The number game
As my research progressed I had begun to see clear evidence of the elements of the foregoing debate. The long-term interests of a company as an entity are most often sacrificed in the obsession to maximise returns to its shareholders.

'Numbers' are inherent part of a target-setting exercise which generally abounds quantitative targets for the company as a whole as well as for the individual employees or functional groups. The performance metrics, of course, differ in details but no other measure can be as unambiguous as a direct numerical figure. Here I have used the word 'numbers' to signify targets set for revenue generating streams in a company-sales of different products and related support services or products in the service sector.

High employee engagement leads to better customer service: Gopal K Gureja
Author Speak

Any attempt to maximise shareholder value and customer satisfaction at the same time can lead to conflict of priorities, Gureja tells Ankita Rai

What are the reasons for misalignment in customer care policy and practice?
Maximising growth has always been the top priority for corporate executives. However, if maximising the shareholders value becomes an overpowering obsession, it can hamper long-term customer relationships. Also, any attempt to maximise shareholder value and customer satisfaction at the same time can end up in internal conflict of priorities.

It is seen sometimes corporate executives pass on subtle messages that the qualitative targets are subordinate to the fiscal numbers. If, indeed, a message as above emerges from the review process, the employees are quick to conclude that their self-interest would be served better by giving priority to the number targets. If, while dealing with customer issues, employees don’t see the company’s values rising above the short-term gains, the customer policy loses its credibility.

What are the signs of breakdown of customer service in a company?
The first signs of the breakdown of customer services emerge from lack of responsiveness — the unwillingness to help and provide prompt service to customers. In terms of customer interaction, lack of responsiveness manifests itself in poor communication, unresolved complaints, indifferent behaviour and lack of competence on part of the customer contact employees.

Please share tips on how firms can engage employees in a more meaningful way.
If you look at the history of some of the companies, particularly known for exceptional quality of customer service, you will find ‘emotional intelligence’ as a common thread running through them. Every decision that a company makes works its way through one or more drivers of employee engagement. To enhance employee engagement, companies should encourage involvement of employees in ideation, provide timely feedback and assurance that well-intended efforts won’t be forsaken for fear of ‘failure’ (highly engaged employees are likely to make more mistakes).

A recent concept that has emerged in HR talks about making employees partners in business . What is your take on this?
Look at any quality improvement methodology and you find that it eventually takes you to the people involved in the processes concerned. Involving employees in the thinking process results in high emotional engagement. Improving quality of service requires people who are willing to walk an extra mile to ensure customer satisfaction.

It was because of this belief that, as part of my empirical research for this book, the list of individual respondents contains more than 150 front-line customer contact employees. Interestingly, I found most of the reasons for policy-practice disconnects within those employees.

Shareholders and the company will have to agree that company's long-term interest may not necessarily be congruent with the short-term shareholders' interest. At least one of the respondent companies in my empirical research was categorical about its priorities on this issue. 'One thing we decided very early', said the CEO, 'as we set up our business. The promoters agreed that long-term interest of the company will take precedence over enhancement of shareholders' value and allocation of surplus generated by our operations. And we stuck to that.'

Not that the Indian companies were not growth-oriented or that improving the bottom line was any less important but excessive focus on maximising returns for the shareholders, even in the short-term, did come about with the multinational companies coming into India. As the intensity of competition grew, the 'critical numbers' representing shareholder value began to drive the CEO much harder. Rigorous, month by month, review of actual against budgets became a more serious exercise and the mindset of the people at the operating level began to change.

Many actions taken by companies with the objective of improving responsiveness produced commendable results. These initiatives resulted in reducing cycle time, achieving cost optimisation, launching value-added service products, and creating opportunities to stay in close touch with the customer.

India's ranking in global competitiveness improved on many parameters, including product quality, overall productivity, cost of production and use of technology. However, in some cases, excessive quest for quick and tangible results, threw 'caution' into the wind. Did that mark the beginning of cultural schizophrenia and the organisational turmoil that followed in some companies? Companies that were alert, however, were quick to learn the lessons and restore reason.

AUTHOR: Gopal K Gureja
PRICE: Rs 550
ISBN: 9788132109563

Reprinted by permission of the publisher. Excerpted from Organizational Schizophrenia: Impact on customer service quality.

Copyright © SAGE Response. All rights reserved.

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First Published: Mon, June 10 2013. 00:09 IST