• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

C. Gopinath

EVERY time, I take my ten-year old car to my mechanic to fix a problem, he will preface his diagnosis with a question, ``How long do you plan to keep this car?'' His logic is as follows: If I plan to keep it for a long time, he will recommend using good parts that will last a long time, and will deal with the problem comprehensively, and price his charges accordingly. If I intend to replace the car soon, he will plan on using second-rate brands and only fix the immediate source of the problem so it will work in the short run.

I never thought this analogy could be extended to shareholders. It turns out that in the year 2000, shareholders in the US held their stock for just about six months. In comparison, 25 years earlier, stocks were held for about five years. Another interesting statistic is that about half of all investors do not know the companies in which they hold stock. That is because they own the stock indirectly, through their participation in a pension fund or a mutual fund.

An owner of an enterprise would tend to take a long-term view. He would forgo dividends and reinvest in the business. He would keep the business strong to outlast seasonal variations and build relationships between employees, and with vendors and customers. On the other hand, a speculator is looking to see what he can get today, or perhaps tomorrow, but not much longer. Large shareholders of Kodak are fighting the company to reverse its strategy of moving from an analog to a digital future. The company cut back on dividends to re-invest in the business while the speculative owners want their payout now.

During the License Raj in India, many industrialists turned into speculators when they found that they could get a better return selling their industrial license, or their coal permit, rather than engage in running a profitable enterprise. Mr Bill George, a former CEO of Medtronics, a leading medical technology company, writing in the Wall Street Journal recently complained that the expectations of Wall Street was one reason CEOs were cutting ethical corners and trying to show better results. They were responding to the needs of shareholders behaving as speculators and not as owners.

Mr George should know. While heading Medtronics, he created an innovative culture in the company by setting a policy, for instance, that 70 per cent of revenues should come from products launched within two years. A policy such as this keeps the organisation focussed on innovation rather than having a few hits and living off those products till they are well past their prime. But how do you ignore your shareholders even if you know that they are merely speculating and looking for short-term gains? The short answer is to treat them better than they deserve!

What that means is to treat them as though they are the owners even though they may not behave as one. That is easier said than done. But we can identify some crucial aspects that are a part of this process.

The first is that the CEO needs to stay for the long term. One statistic suggests that the average tenure of a CEO in the US is only about three-four years. This is not sufficient to make a long-term impact on the organisation. CEOs who come into the job expecting to stay a short time make decisions that would make their performance look good in the short term. They are building their resume and not the value of the enterprise they are running.

Thus, Boards need to take a large share of the responsibility in carefully selecting a CEO who would stay for a while and to work with him cooperatively. Xerox hired an outsider, Mr Richard Thoman, as a CEO because they wanted someone to shake up the culture and make major changes to the organisation. But within a year of his appointment, they disagreed with his decisions, lost confidence in him and asked him to leave.

Set a vision and make it clear to all. A vision suggests a long-term perspective. An organisation that enunciates a clear vision of what it stands for and incessantly talks about it makes it clear to all, whether they are shareholders or customers, what they can expect from the company. Medtronics chose to focus on the patient. They adopted the crisp and unambiguous statement that their main purpose was ``to contribute to human welfare by application of biomedical engineering to alleviate pain, restoring health, and extending life.'' There can be no confusion as to what this organisation is all about! The company also never fails an opportunity to talk about it. I attended a session a few years ago at an academic conference where Mr George was the invitee and he chose to talk passionately about the mission of the organisation. It has remained their guiding force, without change, for over 40 years. He even told his shareholders at every annual meeting that the company was not in the business of maximising shareholder value but in maximising value to the patients.

Demonstrate long-term value by keeping your decisions consistent with your mission. The proof of the pudding is in the eating. Setting long-term performance as an aim cannot be a public relations exercise. Shareholders should be able to take a look at the long-term performance and be convinced that there is value in investing in this enterprise. To achieve that, the organisation needs to keep its decisions consistent with its mission.

When Starbucks, the coffee retailer in the US, a few years ago, decided to move into e-commerce and web retailing of a variety of commodities, the stock market sent them a sharp and strong signal by beating the share price down 28 per cent. People who loved the company's coffee shop chain could not understand what they were doing selling gourmet foods and furniture.

Medtronic has long had a reputation for putting patients before everybody else in its business focus. This is often called a super ordinate goal — some overarching, driving purpose for being in business that is more than making money. And, in the process, they have demonstrated consistent performance with 64 consecutive quarters of increasing revenues and earnings.

It is a common practice at this time of the year for people to introspect and try and make resolutions that they would follow in the New Year. Let us hope our corporate chieftains will resolve to try and convert speculative owners into behaving as true owners. They will need to do that by understanding the basics of their business, set a vision that truly inspires the employees and follow it through in order to build value over the long term rather than just the coming reporting period.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

Article E-Mail :: Comment :: Syndication

Stories in this Section
Hair-splitting on stocks

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line