Who's Most Important?

I got myself into trouble a couple days ago. Over drinks, I was chatting with a small group of managers, and I made the observation that investors and employees are not the most important stakeholders of a company. Customers are. By far. I didn’t think that my comment was particularly controversial. After all, management sage Peter Drucker has been saying for decades that the only reason for a company’s existence is to create and serve customers.
Nevertheless, the reaction to my comment was less than wildly enthusiastic, so I’d like to clarify my remark.

Let’s start with investors. Obviously, investors are important people, particularly for companies that desire a little capital! And these important people are, quite properly, very attentive to metrics like a company’s market capitalization and stock value. Sensibly, the company’s leaders should be too.

But good leaders—and, increasingly, smart investors-- also recognize that those metrics are scorecard consequences that are very strongly influenced by customers’ perceptions and responses. Simply put, where customers react to a company and its offerings with enthusiasm and excitement, investors follow. When customers leave in droves, investors follow.

When a company’s leaders view escalating shareholder value not as the consequence of a customer-alluring strategy, but as the raison d’etre of the business itself, that’s when the trouble begins. Managers become obsessed with short-term financials and “meeting their numbers” any way they can, customers be damned. Most of the innovation and entrepreneurship goes into “creative accounting” and financial sleight-of-hand, not towards products, services and experiences that delight customers. And of course, the heroes inside the company become those people who count things rather than those who make and sell things. Unless you're shorting or spinning stocks, is this the kind of company you’d want to invest in? Paradoxically, the more that leaders focus on investors as opposed to customers, the more likely that returns to investors will suffer.

Now what about employees? Well, once again I beg to challenge feel-good thinking. Organizations are not built for employees and managers. In fact, one of the best predictors of organizational decline is a bloated payroll of employees and managers who are content with the status quo and resist change, or whose skills and interests no longer fit the new realities faced by the firm. I was recently in a management meeting where the executive vice president said in exasperation: “We fall in love with our people regardless of their performance and regardless of their contribution. I’m tired of seeing happy people high-fiving each other when the results stink. I want to see high-fives only for results.” Hear, hear!

Sure, people like Hal Rosenbluth and Howard Schultz built the great Rosenbluth International (a $3 billion global travel agency) and the great Starbucks by having a catchy philosophy that “the customer comes second”, employees first. But come on. These guys never said they’re running charities. What they’ve said, quite correctly, is that companies need to concentrate on making sure that their employees have the best skills, technologies, power, compensation and morale. And why? Because that’s the best way to serve customers!!! Once again, those darn customers trump everyone else.

I suppose I would have been better off had I raised my drink and said "Here's to investors, employees, and customers; they're all important." But that would have been a vanilla cop-out. The reality, to paraphrase George Orwell's Animal Farm, is that all stakeholders are equal, but some stakeholders are more equal than others. As a leader, you’d be foolish to ignore the needs of your employees and the concerns of your shareholders, but if you seek sustainable competitive advantage, remember that the primary purpose of your job and your company is to help make customers very, very happy.