The thinking of systems
Sometimes in the 1970s, an idea caught fire in the US. It originated in an essay published in 1970 by Milton Friedman, “A Friedman Doctrine”. By the end of the decade, this became the defining mantra in most North American business schools. By the end of the following decade, it had become ingrained in the stock market. By the end of the century, it became the foundational principle of the industry that I work in.
The idea is summed up by this statement: “The purpose of a business is to maximize value return to its shareholders.”
It’s a load of horseshit.
Apologies for the language, but it’s true. This mantra has served as the basis for an economic principle that has fundamentally damaged the economic system that we all are supposed to benefit from. The author - Friedman - was a polymath and bonafide genius. He was probably the most influential economist of the 20th century (some would argue the most important), but also contributed to mathematics, science, and engineering in his storied career. He was, by all descriptions but height, a great man. (Here at The Greenman, it must be said, we do celebrate our short kings.)
But that essay? It’s horrible. First: it proposes that businesses that have any focus at all on social responsibility are selling their shareholders short. The generation of profit is the ultimate goal. That corporations, as artificial persons, cannot carry a social weight since they cannot carry social value.
There’s a whole other argument based on the social responsibility vs capital responsibility, but that’s not where I’m going with this post.
The practice of business
The current state is that we’ve continued down the maximize value return slide. We’ve gotten REALLY good at value extraction. As an economy, and because of that as a society, we’ve focused our efforts on identifying the highest value things we can find, and sucking them dry of their value. That value trickles up into funds and bank accounts to reinvest that money into efforts to extract more value. I call this extraction economics.
Venture capital and investment capital at this point are basically the same thing, only they eat from different ends of the beast. They both try to identify businesses that have high worth and low cost, buy those businesses, and restructure their operations to squeeze all the value out of the business, then sell it to someone else (or run it into the dirt) and then move on to the next victim.
For venture capital, the focus is growth. Growth above all else. Growth is better than profit. It’s better than ideas. If a new market business is growing, then the whole crowd of VC investors gather around trying to inflate the value of the company and then steer it towards an “exit.” An exit is a money event where the investors get to cash out and move on to the next thing, whether it’s IPO or selling to a bigger fish. In neither case are they worried about building a sustainable business that can keep on chugging.
Investment capital is similar - buy companies with a strong brand, preferrably at a discount, and then restructure the companies process and assets to push returns hard until they run the company into the dirt and sell it off to move on.
There are exceptions to these ideas, and there are indeed VCs and ICs that do a good job of building sustainable efforts.
They’re rare.
The times, they might be a-changing
That being said, the winds are changing. For the last 10 years, it’s more and more coming around that this is not bright. In 2009, in an interview, former CEO of General Electric said that the focus on shareholder value is “The dumbest idea in the world.” Here’s an article from Forbes in 2011 that goes deeper about it.
Hopefully, this is a true sea change. Inflation is up, wages are stagnant in most industries, and I’m watching my grandnieces struggle as young adults in ways I never had to. I’d love to see an economy based around the idea that a business’ purpose is to maximize value to its stakeholders - in this case, its customers and employees. Provide products and services at a good value to customers, and provide good wages to employees as well as building a work environment where the employees are proud and happy to come to work every day. Money is a component of value, but it’s far from the whole thing. This is how Apple became strong. How Delta grew to the largest airline in the world.
A guy can hope, at least.
“It is not the style of clothes one wears, neither the kind of automobile one drives, nor the amount of money one has in the bank, that counts. These mean nothing. It is simply service that measures success.” - George Washington Carver