Summary
The ideology of shareholder value has dominated the thinking of many U.S. companies for at least two decades, to the detriment of longer-term strategies and internal investments, and often in practice mostly to the benefit of management's compensation packages. This article questions whether even Cisco will ultimately suffer the sad fate of other former U.S. icons (Lucent, GM), following a relative neglect of investment in internal development and excessive reliance on financial maneuvering.
Analysis
The article makes the point that Cisco has expended very large amounts of its cash on stock repurchases while relying to a large degree on external acquisitions for developing new businesses or products. Its ability to make these acquisitions relies in turn on a continually rising stock price. In parallel Cisco has made extensive use of stock options to compensate its management, who of course also benefit the more the stock price rises. This pattern of behavior became widespread among U.S. companies from the 1980s on, promulgated by major business schools and prestigious economists in the name of maximizing shareholder value, and driven by Wall Street's expectations. But like the disastrous consequences of a blind expectation of continually rising house prices, what happens when the music stops? How does a single minded focus on the stock price, usually on a quarter by quarter basis, affect (i.e. minimize) a company's attention and willingness to try to anticipate, address, and ideally shape long- or even medium-term factors of change in competition, markets, and staff expertise and commitment which if neglected can destroy even the most powerful or even invincible companies such as Lucent or GM or Nortel once appeared to be? Shareholders are only one of the stakeholders in a company and even shareholders may have multiple simultaneous roles, e.g. as employees, consumers, and suppliers. A single minded focus on shareholder value has proved woefully inadequate at best and toxic at worst for the health of companies and for the interests of other stakeholders or these other roles. In the long run shareholder value is the outcome of strategic choices and initiatives (and a degree of luck). But it does not itself constitute a strategy. A continuous emphasis on maximizing stock prices as the measure of shareholder value in a consistently short term perspective, with executives rewarded on this basis on an annual schedule, is almost bound to lead to disaster sooner or later if (which is often the case) the dynamics and success factors, or even the boundaries of the businesses in which a company is operating change substantially over periods of 10 to 20, or even 3 to 5 years. Perhaps Cisco will escape the fate of Lucent, but it is disturbing that several key aspects that have led to disaster in other companies seem also to be characteristic of its behavior.
