Capitalism is built on ROI, or return on investment. Corporations exist to maximize value to shareholders. Even small businesses have to produce ROI for the owners in order to make sense.
This whole system started from a place where the best way to maximize shareholder value, in the very beginning, was to create value for customers. The theory went: if a business creates value for customers, then customers will buy the business’s goods. When people buy goods, long term value is created.
Then we discovered marketing. Marketing is the art of convincing people they need your thing, and, in some cases, even when they might not actually benefit from it. Now the goal was to convince people to buy the thing, not necessarily to be valuable.
Next, we came up with our best invention of all: quarterly earnings reports. With quarterly earnings reports, it’s most important to meet analyst projections for the next three months. As long as projections are met, stock prices are more likely to remain stable (or go up).
And then day trading came along. In day trading, an investors incentive is to find arbitrage opportunities. Or, in other words, try to buy low and sell high. With day trading, investments are no longer long term. In fact, they’re inherently short term by nature.
Somewhere in the hurricane of all this, we’ve lost our way. Corporations on short term results and protecting what they have. They’ve become so focused on avoiding investor backlash in the short term that they’ve forgotten that visionary leadership and creating value is what it takes to create long term value.
And this is why a company like Coca Cola (or Procter & Gamble, etc) will never transform itself… unless we change the system and the incentives.
There are at least two ways to combat this ridiculousness:
- Start a company that changes the status quo by focusing on long term outcomes and creating customer value
- Buy from, promote, and invest in registered B-Corporations, whose incentives are to maximize value for multiple stakeholders (investors, customers, environment, etc)
- Stop buying from the companies who have lost their way; give them an clear message about what it will take to maximize shareholder value in the future
Sure, Coke may never change, but that doesn’t mean we’re helpless. In fact, it puts us that much more in control of the future. Take advantage of it.
Thanks to David Lindop for the inspiration for today’s post.
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