Moving from whisper to rumble is the growing chorus of voices questioning the preeminence of shareholder value as business philosophy. Among them is Unni Krishnan, founder and CEO of Long Brand, a company continuing the philosophy he implemented at Brand Finance where he created their Indian operations, delivered more than 150 projects across 23 sectors, including helping the likes of Tata, Godrej, Larsen & Toubro, United Breweries Group, Amalgamations, and Raymond. In particular, Krishnan feels there is an opportunity for companies to better serve society if they bring corporate purpose, as expressed in authentic branding and mission statements, into alignment with the business’s actions.
CFA Institute: Is there a crisis in capitalism right now? If so, what is it?
Unni Krishnan: The crisis is one which is born of a worldview or a set of implicit assumptions we hold in employing capitalism rather than the system per se. We have been running the system with a mindware which is out of date and it requires a reboot.
The mechanistic and reductionist worldview which underlies business and political leadership promotes an inherently divided, disconnected, and piecemeal approach to capitalism. This has produced deep contradictions, fragmentation, and unintended consequences like climate change and social inequalities.
It is high time we snap out of this and put some of our dearly held collective assumptions to a litmus test. This is a good first step in any scientific inquiry when faced with stubborn intractable problems.
What are the elements of the "mechanistic and reductionist worldview" to which you are referring? And what are some examples of the consequences of these elements?
The principal elements came together from the times of the Enlightenment over 200 years ago. It had three broad streams which fused into what we generally accept as reality today. It has the Newtonian and Cartesian views which reinforced duality, linear causality and materialism. These ideas blended with Adam Smith, John Locke, and others who declared that the essential nature of man as Homo Economicus — rational, detached, acquisitive, and utilitarian.
This in turn combined well with Darwin's survival of the fittest idea, which evolved into social Darwinism proclaiming the benefits of competition to weed out the weak. Over time, these ideas have coalesced into a widely accepted set of unquestioned beliefs and values we run society, science, and business with.
Today we have to confront the uncomfortable fact that this long-held collective worldview is breaking down spectacularly in all the three realms. If one surveys the corporate landscape we see these dogmas regularly expressing themselves through symptomatic challenges which firms are facing.
Consider HP which split up recently. The origins of its current problems lie in the past when it spun off Agilent, which represented half of its innovative culture and defined its purpose of existence. Devoid of its original business design crafted by Bill [Hewett] and Dave [Packard] over decades, the company was sucked into the vortex of hitting quarterly earnings estimates and today is nothing more than a shadow of its former self, being tossed around without the rudder of a purpose-led business architecture.
Similarly, IBM seems to be caught up with deploying most of its capital for share buybacks in an effort to chase quantitative EPS goals set up by Sam Palmisano. This was after all the firm run by Thomas Watson, Jr., who put in close to $35 billion (in today's value) to invent the System 360. So what could be the long-term value creation upside for IBM if the $37 billion it invested in share buybacks in the past three years was deployed into innovation at a time when technology change is reshaping society?
There is a pressing need to litmus test the implicit assumptions and mental models being held by leadership and lay bare the long-term value creation upside/risks associated with it. Such an introspective pause can help release trapped true potential and surface unmitigated asymmetric risks.
So if I understand you correctly, you are diagnosing a kind of cultural illness within businesses, but also within capitalism itself? Assuming I've got that right, what is your prescription for the illness?
Quite right. We refer to it as the HIV of modern business. It originates with a "linear money machine" cognitive model of business held tacitly at the leadership level. The shareholder value maximization paradigm has legitimized this model to such an extent that most actors in the capitalistic system believe it to be a sacred law.
We put this default worldview into sharp focus and uncover the implicit assumptions held across leadership and management. From this start point, we map the entropic pathways these assumptions take to deplete purpose, values, culture, innovation, and reputation, thus shaving off vast chunks of long-term value of the firm. It lays bare in depth and detail the deviations/defects in the translation of values to value creation and its asymmetric risk.
Such a six sigma of values to value creation acts like a body blow (empathetically delivered) to the collective consciousness of the firm and puts leadership into a deep introspective pause. It prepares the ground to plant a purpose-led business architecture and visualize its nonlinear value creation upside.
Such a collaborative commons wealth creation model can be institutionalized through regular litmus testing of values to value sigma, so that it does not relapse to the old ways. This is an immunization program we have developed over a decade so that firms can fight back against short-termism and complexity which is sapping their longevity and vitality.
What are the elements of a typical therapeutic intervention?
All interventions have three foundational elements. We begin with putting the stated and unstated leadership challenges through the values to value creation litmus test which I described earlier.
The second step is to build a purpose-led business architecture through collective leadership intuition. It begins with purpose of existence which emerges after a few cycles of brutal introspection when the mechanistic model assumptions fall away. Such a purpose of existence will serve some of society's greatest challenges and aspirations and produce extreme trust with stakeholders. It will capture the imagination of people in a quest for shared meaning across functions and levels. This sets up powerful lateral coherence inside and outside the firm to produce long-now financial value. Such outcomes can be reinvested in a returns-to-purpose virtuous cycle, moving into higher orbits in time.
The final third step is to plant seeds of personal transformation at leadership through perennial principles. There are four timeless capabilities in vanguard leaders — a capacity for deep introspection, a bias towards the long view, swiftly slow in actions, and awaiting accelerating returns.
What are some concrete examples of success you can mention?
What constitutes the success of an emergent service such as ours? The opportunity to co-create such an atypical approach with more than 80 clients over 11 years, including some of the largest Indian MNCs like Tata, Godrej, Reliance, L&T, and global firms like Lafarge, has been worthwhile.
Engagements have consistently generated a strong positive dissonance with the status quo of financial capitalism and that is rewarding. When clients make brave attempts to execute on purpose-led models and generate superior value outcomes, we are thrilled.
Finally, when our clients are ready to leave inhibitions behind and openly engage in deep yet discomforting conversations, we feel privileged. This is how we view success and maybe that is unusual, too.
We are in the twilight zone of a great transition where the fundamentals of capitalism are being reshaped in a profound manner. Letting go of the familiar and embracing an alternative narrative will call for courageous conversations and deep collaboration across disciplines. So multidisciplinary finance can play a lead role in the regeneration of capitalism.
The upcoming 68th CFA Institute Annual Conference in Frankfurt will include a panel discussion on Long-Termism and the New Era of Fidicuary Capitalism. Delegates will hear Keith P. Ambachtsheer, Leo de Bever, and Andrew Sheng discuss common threads that run through long-term-oriented, successful investment organizations in a session moderated by Roger Urwin.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author's employer.
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15 Comments
Hello Savio,
I love your response...clearly articulated and elegantly argued. Well done. Thank you always for civil discourse (the course I tilt toward when trying to advance discussions).
Several points via questions:
* Would you agree that you have an implicit time horizon built into your explanation of how management should manage a company? Namely, it sounds as if you are advocating for management adopting a perpetual time horizon, yes? If so, how does that jibe with those shareholders, like an Icahn, who take large interests in business to influence board decision making, ergo managment, to restructure the company so that his payback period is, at most 18-24 months? In other words, management cannot afford to have a time horizon assumption if they are slavish to the generic conception of 'shareholder.' Here we get into some paradoxical situations. If management makes the choice to manage the business for perpetuity, yet the average holding period for their stock is not perpetuity (and always less than a year) how can management say they are managing the business for shareholders?
* Then there is the small matter that while EPS may march upward in a linear fashion, stock price does not. For all shareholders to be satisfied they must be as confident as the philosophical shareowner who desires management manage a business for perpetuity that there will be an upward trajectory to EPS and that the share price will follow suit eventually. But that word 'eventually' is again a time horizon mismatch for most shareholders, where holding periods are always less than a year. Do all shareholder constituents agree that stock price will follow upward EPS growth? If not, we are back to the same problem: to which shareholders should management be held to account? And for what time horizon?
* And last, if your time horizon is that management should manage the business for perpetuity I will point out a problem. Namely, managers in that equation are no longer managing for the benefit of shareholders. Instead, they are managing for the benefit of the entirety of, and the perpetuity of, the life of the business. This is a very different focus on the part of management. It is away from one claimant, shareholders, back to the benefit of all those that contribute to the success of the business, and have claims based on that success.
Yours, in service,
Jason
Hello Jason
There is an excellent book on Corporate Finance called the Fundamentals of Financial Management by Brigham and Houston that you refer to in your book The Intuitive Investor as recommended supplementary reading.
In this book, each chapter is preceded by a real life illustration of what the chapter is about.
Chapter 16, Managing Current Assets, has a story about the turnaround at Core Industries that encapsulates what I was getting at and which I think will answer your questions.
I quote from this "At an annual meeting of shareholders the new CFO, Ray Steben said that while sales had increased by 12 percent, profits jumped 29 percent and the stock price 79 percent. The improvement resulted primarily from the company's renewed focus on shareholder value and better working capital management. In Steben's words 'These strong sales and earnings figures are further evidence that shareholder value will continue to be focused upon, and your management will be stewards of the capital entrusted to them' ".
Using this as an example, management should, in my opinion, focus exclusively on maximizing shareholder value and improving corporate governance.
As you point out, there will be factors that must be carefully considered so that this value is maximized, such as customers, employees, suppliers, environmental impact, technological advances, and so on.
Hope this helps.
Kind regards and a pleasant weekend
Savio
Hello Savio,
Thank you for taking the time to thoughtfully express your answer and to return to the discussion.
Yours, in service,
Jason
It is rather unusual to find a CEO who has any knowledge of philosophy and the history of ideas but Unni Krishna seems to have a solid grasp. And you are absolutely right about the "soul" of HP as having been spun off with Agilent. The problem is one of the scale of the technologies. The medical devices and instrumentation businesses are inherently small scale. In divisions of a few hundred people the HP culture can flourish. When HP got into larger scale businesses the functional silos and separation of people in space and time made it much more difficult. For a deeper look at the issues see my recent article: http://www.themontrealreview.com/2009/Post-Rational-Management.php
Hello David,
Thank you for the two comments you made adding to the thread. I also appreciate Mr. Krishnan's appreciation for philosophy and for the history of science.
The Davis Funds, for whom I used to work as an investment manager, was HP's ninth largest shareholder and we routinely discussed the cultural shift that happened at HP as its culture slammed headlong into the dot.com era. It was, and is, a very interesting time for businesses that take the long view.
Yours, in service,
Jason