Shareholder Value

This is the second of my sample articles for the Informatik-Spektrum:

The term Share Holder Value was first introduced by Alfred Rappaport (* 1932), a US Professor for business management. Seen under the light of how fast time passes in the age of the internet, the term is relatively old. Nevertheless, it has become fearfully fashionable in German economy as well. Mr. Rappaport defined the value of an enterprise in a linear dependency to its dividend and stock market value. Optimizing the “shareholder value” becomes the executives’ central issue, their income depends on the result. This is called “shareholder value” principle, which, having been imported from the USA, now is on the path to victory in Europe.

Enterprises are seen as machines that generate turnout as planned and make profit. What we tend to forget is that enterprises are full of human beings. They form social systems that do not work like machines, but rather like organisms. Enterprises can die. During the last 30 years, I witnessed the downfall of quite a few IT enterprises.

Thinking in terms of “shareholder value”, you ignore the dimension time and the external world of an enterprise. How to evaluate the life span of an enterprise? Can we really just ignore the net product of an enterprise and its consequences on the environment and other social systems? The answer is: no, you must not make the dividend and the sales value the measure of all things! To be sure, the capital belongs to the share holders, but there are other stake holders, as well:

  • the customers, who are a factor no enterprise can do without,
  • the employees, who make up and give life to the enterprise,
  • the suppliers that every enterprise relies on,
  • the community the enterprise calls its hometown,
  • the state it pays taxes to,
  • the employees’ families,the kindergarden and the pub around the corner

and many more …

Especially in IT service enterprises, the limiting factor is not the capital. It is the employees who define the enterprise value. With their work, they realize the turnout. And without customers, nothing happens at all! Customers and employees are the most important stake holders of an enterprise!
When I started working for Siemens München in 1976 as a regular employee, all newcomers were welcomed in the casino by a real director. He proudly told us how the customers benefited immensely from Siemens products. Then he told us about the “social balance” at Siemens AG. We were fascinated to the last man – and proud to be part of the Siemens team!

Reading the economy news, I find nothing about how customers benefit or social balance. All you read is about profit and loss, bankruptcy and mergers, crises and economic war. Greed rules and it seems that the original duty of the economy to provide us with life’s necessities is  forgotten.
It is dangerous and foolish to make “shareholder value” the sole criterion for a successful enterprise. The “shareholder value” principle produces a small number of winners and a far greater number of losers.

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