Customers should come ahead of shareholders

Corporations should stop trying to maximize shareholder value. Instead, they should try to maximize customer delight.

That’s a key idea in Roger Martin’s new book, Fixing the Game: Bubbles, Crashes and What Capitalism Can Learn from the NFL.

You can read it quickly and enjoy it, even if you’re not a football fan.

In the NFL, there are two arenas where the game is played: (1) The football field, where teams make passes, blocks, tackles and score touchdowns, and (2) The expectations market, where gamblers try to guess who will win and place bets on one team or another.

Similarly in business, there is the real world, where companies sell goods and service to customers and try to increase profits. Then, there is the stock market, where investors place bets on companies they hope will outperform rivals.

Martin, the dean of University of Toronto’s Rotman business school, thinks it’s perverse to use stock-based incentives to reward executives. They distort behaviour and lead to excess risk-taking to earn outsize returns.

He admires NFL Commissioner Peter Rozelle’s firm stand, back in 1962, to ban players and coaches from betting on football games.

The NFL realized that, just like a parasite that eventually kills its host, sports betting had the ability to destroy the sport. So, it enforced a strict separation.

But in business, the players in the real game are encouraged to invest heavily in the expectations game. CEOs get stock options to ensure they focus on maximizing shareholder value. They talk frequently to stock analysts about future earnings and give guidance for traders. Says Martin:

When the real market is dominant, customers are the focus and the central task of companies is to find ever better ways of serving them. When the expectations market is dominant, traders are the focus and gaming markets is the task.

The real market produces meaning and motivation for organizations. The organization can create bonds with customers, imagine great plans and bring them to fruition.

The expectations market, on the other hand, generates little meaning. And over time, in trading businesses, since there isn’t opportunity to build something positive for the world, the motivation migrates to earning as much compensation as possible.

He talks about Johnson & Johnson, which adopted a corporate credo in 1943: Customers first. Employees second. Communities third. And shareholders last.

In 1982, when cyanide-laced Tylenol caused seven deaths in Chicago, J&J developed tamper-proof packaging for all its products, an innovation that would become the industry standard.

The company didn’t use insincere apologies to downplay the crisis, as BP did last year after its massive oil spill in the Gulf of Mexico.

Johnson & Johnson’s investors are doing just fine. So are those who own shares in Procter & Gamble, which also puts consumers first and expects shareholder value to follow.

Then, there’s Apple, whose CEO Steve Jobs is the model of a customer-focused executive.

All three companies have stumbled from time to time, Martin says. But they’ve outpaced their peers in creating value for shareholders, while putting customers ahead.

If you take care of customers, shareholders will be drawn along for a very nice ride.

The opposite is simply not true: if you try to take care of shareholders, customers don’t benefit and, ironically, shareholders don’t get very far either.

Martin has just won a 2010 McKinsey award from the Harvard Business Review for an article called The Age of Customer Capitalism, which laid out the thesis for this book.

Customer delight is a noble goal, in my opinion. Many companies talk about it, but few pull it off.

Companies need to invest in excellent systems and staff on the front lines. They can’t see customer service as a cost to be cut again and again.

Here’s a challenge for my readers. Which companies treat you with respect and make it a joy to deal with them? Please provide any names that can serve as an example to others.

How to bring back great customer service

I kicked off my blog four years ago with Bell Blues. In my Star column, I recently moaned that Bell’s customer service is still inept, judging by the complaints I get from readers.

Even Bell’s attempt to send out $67.41 rebates, ordered by the regulator to customers who’d been overcharged, led to a new round of criticism.

How can a corporate culture be turned around? How can a company change its focus from cost cutting to investing in customer service?

Some people think social media can transform the way customers are treated. Check out a new book, The Thank You Economy , which says we’re back in a community where the individual voice matters a lot and the business owner needs to care.

Author Gary Vaynerchuk is a U.S. entrepreneur who built a big wine business with effective use of social media. You can download his first chapter for free here.

Word of mouth is back, he says. Any businessperson who can’t see the repercussions has his or her eyes closed.

When faced with bad service or unfair policies or plain old indifference, there’s something people can do. Now, if customers have a complaint that they can’t get resolved via traditional channels, they can post a frustrated status update or tweet that could get passed along forever.

Suddenly, everyone who’s ever had a problem with a company can compare notes, work himself or herself up into a righteous frenzy and build enough animosity via word of mouth to create a real PR nightmare.

The example he uses is AT&T, the U.S. phone company that mishandled a customer’s request and saw the complaint go viral. Suddenly, AT&T had a massive headache.

Everything is in reverse. Before, it made some financial sense for big business to simply ignore people they considered whiners and complainers. Now, dissatisfied, disappointed consumers have the power to make companies feel the pinch.

What a shame that’s what it’s going to take to make some executives take social media seriously.

This blog is part of the social media landscape in Canada, one of the few that takes consumer issues seriously. In my work, I try to advocate for people who feel stymied and hopeless in their dealings with large companies.

“When society cut the close personal ties that existed in older, smaller communities, people became like like ants scattered around a picnic table — really busy, really strong, but too far apart from one another to get much accomplished as a unit,” Vaynerchuk says.

“Now, the Internet has matured so that the power of social media can allow all the ants to collectively gather under the table, and they’re strong enough to haul it away if they so choose.”

So, let’s keep talking to each other and sharing our customer service stories in a forum that can’t be ignored. I’m posting some of the latest feedback on Bell’s bungling below.

My University of Toronto continuing education course, The Facts of Life about Your Finances, starts Thursday, April 7, and runs for six weeks. Here’s a link.