Picked up from a statement made by Jack Welch in 2009[1], the “The Dumbest Idea” phrase has been cited so very often in media debates that it has now become synonymous with the term ‘share holder value maximisation.’ The full statement reads:
“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.”
Such a stunning denouncement of strategic infatuation with shareholder value, coming from Jack Welch was not without an element of surprise. In the most-cited business article of all time—Theory of the Firm (1976)—Michael Jenson and Willam Meckling[2] had strongly argued in favour of the premise that the purpose of every corporation should be to maximize shareholders’ wealth. Jack Welch, was believed to be a strong advocate of this premise. The speech he made in 1981—shortly after taking over as the CEO at GE—was, therefore, widely interpreted as the “true dawn of the era of shareholder value”. It was in this backdrop that ‘the dumbest idea’ comment came as a surprise.
Really Dumb?!
As part of the seminal research I am carrying out for a new blog, I hit upon a post ‘Jack Welch Elaborates: Shareholder Value’ published on March 16, 2009, four days after his earlier story had appeared in the Financial Times. Based on a question-answer session conducted by Suzy Welch, Jack explained his stand as follows:
“You would never tell your employees, “Shareholder value is our strategy.” That’s not a strategy you can touch. That’s not a strategy that helps you know what to do when you come to work every day. It doesn’t energize or motivate anyone. So basically my point is, increasing the value of your company in both the short and long term is an outcome of the implementation of successful strategies. I’ve always felt that way, and I’ve always said I felt that way….“I never mentioned the term shareholder value in that particular speech (1981)… somehow, that speech got spun in the FT article to equate short-term earnings and shareholder value. That I just don’t get”.
I am guilty of having opened the prologue to my book—Organisational Schizophrenia—by saying: “Jack Welch of General Electric and Roberto Goizueta of Coca Cola were considered among the most outspoken advocates of the premise that enhancement of the shareholder value has to be the primary focus for a company’s performance”. While I stand corrected, I am trying to find some way of saying ‘sorry’ to Jack Welch through a direct communication.
On the other hand, Jack Welch might feel a bit pleased to know that, it is ‘the dumbest idea’ phrase that, in essence, runs as a common thread through each of the ten chapters comprising Part III of my book. This part of the book—The Cultural Schizophrenia—is based on the inputs gathered from empirical research spanning 12 companies and 200 professional respondents. Each chapter unfolds examples of tyrannical impact of overly obsessive pursuit of profit maximisation that ultimately ends up in organisational schizophrenia—an ailment that incapacitates a company to deliver the promised quality value-adding customer service.
Dumb Idea Leads to Dumb Culture
The culture of an organisation imparts predictability to employees’ behaviour. A strong, positive customer-centric culture spells clarity of thinking and sets a direction for the employees about what to do and how to deal with customer issues. Should the employees perceive weakening of the culture because of contradictions in leadership’s priorities; lack of discipline in thought and in action; ambiguity and indecision they can get caught in action-paralysis. The declared core values and customer focus become a question mark, and initiative suddenly becomes risky.
Unbridled pursuit of the ‘dumbest idea’ with frequent and illogical reshuffling of priorities dents employees’ engagement, distorts perception of self-interest, causes loss of objectivity and negates discretionary effort . Predictability of behaviour—the hallmark of a strong culture—is lost and the customers begin to look at the relationship as a self-serving and unstable alliance. It is this work-place climate that represents organisational schizophrenia. It is this phenomenon that lends its name to the book.
In the ultimate analysis, when the pursuit of the ‘dumbest idea’ is allowed to become an overriding priority the company is sure to end up with the ‘Dumbest Culture.’
From shareholder capitalism to customer capitalism calls for a change of the mindset. And that is a tough call. If a company has to create and preserve competitive differentiation in its image as a truly customer-focussed company, and if it is to stop the onslaught of organisational schizophrenia or the ‘Dumbest Culture’ its top management must declare, upfront:
- An unambiguous ‘customer-first’ policy and
- A ‘culture of discipline’ that will not tolerate violation of company’s core values—particularly at the top management level.
Gopal K Gureja
[1] “Welch Denounces Corporate Obsessions” Financial Times front-page story (March 12, 2009).
[2] Michael Jensen andWilliam Meckling,‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’, Journal of Financial Economics (1976), as quoted in The Economist.