Who’s On Top—Shareholders or Stakeholders?

A recent Washington Post article on the presidential race rekindled a long-simmering “shareholder vs. stakeholder” debate. How should profit-seeking businesses parcel out their time, energy, and money among competing constituencies like investors, employees, customers (including regulators), communities, suppliers and the like?

Utility communicators, no less than presidential candidates, have decidedly different views about which group is the proverbial “first among equals.” Should profit-seeking utilities focus mainly on maximizing profit and distributing those profits to their owners, the shareholders? Or do they have a broader purpose that includes meaningful commitments to employees, customers, and the communities they serve?

The Post article discussed President Obama’s focus on rival Mitt Romney’s track record at Bain Capital. Under Romney’s tenure, Bain and its investors earned hefty profits by buying distressed companies, turning them around, and then either breaking them up or selling them off.

Overall, Romney, Bain Capital, and Bain’s investors—in other words, the shareholders—made a lot of money from these deals. Not all of them worked out equally well. But hitting the proverbial jackpot on some deals offset the ones that failed or returned only moderate profits.

Of course, not everyone benefitted equally from Bain Capital’s pursuit of maximizing profits. In many cases, maximizing profits for the benefit of shareholders meant closing businesses and letting employees go, which triggered a host of negative events in affected communities. Tax payments to state and local government declined, leading to a lower quality of life. Teachers were let go, leading to larger class sizes and lower quality of instruction. Sometimes taxes were increased to offset the smaller tax base created by shuttered businesses.

You get the idea: An exclusive focus on one constituency—shareholders—imposes woes and costs on other stakeholder groups like employees, customers, and communities. That’s what President Obama is getting at when he asks, “How do we create an economy where everybody from top to bottom, folks on Wall Street and folks on Main Street, have a shot at success?”

This debate didn’t start with the 2012 presidential election, and it transcends today’s bitter partisan political landscape. And how it plays out will have particular importance for utilities and those who communicate on their behalf.

Most businesses, such as airlines, factories and financial services companies, can close their doors in one location and relocate somewhere else. Some die outright. But not utilities—they are intrinsically connected to the communities they serve. Utilities have no reason for existence aside from their geographic imperative—providing safe, reliable, and affordable electric or gas service to businesses and residents in a particular location.  Utilities can automate some functions and improve their business processes, but they can’t abandon their geographic footprint.

And they can’t afford to put all their eggs into one basket by devoting disproportionate attention to any one constituency—including regulators. For many years, success in the utility business turned on successfully managing the regulatory relationship. A good result in the PUC hearing room typically led to higher earnings, increased dividends, and happier shareholders. But that kind of mechanical formula for success is gradually giving way to a more decentralized system of checks and balances, where customers and communities have a more powerful voice.

More than 40 years ago, economist Milton Friedman launched the “shareholder vs. stakeholder” debate when he provocatively asserted in a New York Times Magazine article that profit-seeking companies had only one purpose: maximizing profits. Period. In effect, other constituencies like employees and communities didn’t matter. They would benefit, directly and indirectly, over time, by the profit-maximization strategies of private businesses. Jobs would be created, Taxes would be paid. Communities would flourish. Civic life would be enhanced.

Friedman (who later won a Nobel Prize) and his free-market colleagues dominated U.S. intellectual and business life during the last quarter of the 20th century. In the movie Wall Street, Michael Douglas’ Gordon Gekko character could not plausibly assert, “Greed is good,” had Friedman and his colleagues not first paved the way by legitimizing profit maximization as the be-all and end-all of profit-seeking businesses everywhere.

Regardless of your political affiliation, it’s hard to conclude that the narrow and exclusive focus on the needs of shareholders has been a universally good thing. Yes, profit maximization has brought us life-saving medical breakthroughs, better-built cars, an avalanche of consumer electronics, and untold other benefits. But the relentless, single-minded pursuit of profit also brought us insider trading scandals, Enron, off-shoring, and the financial system meltdown of 2008.

Some utilities have been burned when they followed Friedman’s mantra. In one case, a shareholder-owned utility that was at the time trusted and respected decided it needed to adopt a different strategy. Until that time, the utility had done well for nearly 100 years by paying equal attention to four stakeholder groups: investors, employees, customers (including regulators), and communities. Employees likened it to a four-legged chair: hard to tip over precisely because it was balanced across all constituencies.

Unfortunately, that utility’s board of directors decided that what had worked so well for 100 years was now hopelessly outdated and passé. As the utility’s business environment changed, so too would the utility. In effect, the board instructed the CEO to, as one manager at the utility told me, “saw off three legs of the chair. From now on, we will focus exclusively on shareholders. After all, they own the company. We’ll take care of the other stakeholders only after we take care of the owners.”

It wasn’t too long before this particular utility toppled over. In hindsight, it was easy to see that a one-legged chair was unbalanced. It was bound to tip over. The board of directors soon recognized the shortcomings of its exclusive focus on shareholders. In letting the CEO go, the board acknowledged that he had done a great job implementing a bad strategy. In effect, the board apologized—then set out to reattach the other three legs of the chair.

More than 10 years later, this utility is still cleaning up the wreckage inadvertently created by its board of directors. I’m confident they’ll get there. But their job has gotten harder because of all the other trust-eroding things that have happened to utilities over the last decade, like price increases.

An “all shareholders, all the time” strategy holds significant perils for shareholder-owned utilities. Indeed, a few years ago that approach led to the death of one shareholder-owned utility, Aquila. I suspect it played important contributing roles in recent Smart Grid and Smart Meter-related troubles that have hit Pacific Gas & Electric and Xcel Energy, respectively.

A lot has happened since Friedman’s “all shareholders, all the time” advice. And in reality, few profit-seeking businesses have Gordon Gekko’s single-minded devotion to profit maximization. He may have been expressing a common sentiment among financiers when Wall Street was filmed in the 1980s, but today his one-dimensional “greed is good” speech highlights the folly of such a singular focus on one constituency.

For utilities, today’s “shareholder vs. stakeholder” debate is taking place against a backdrop of rising utility prices, stagnant or shrinking workforces, smaller discretionary budgets, and a customer base that is indifferent—unless it is suspicious or angry about something. Utilities court danger when they overlook the wishes of their non-shareholder stakeholders.

Ultimately, as locally rooted businesses, utilities require the consent of their stakeholders to operate. That means they should consider the benefits of providing equal value to—and communicate effectively with—all groups that have a stake in the utility’s business.


© 2012 by Egan Energy Communications, a utility communications firm working with utility communicators to turn stakeholders into advocates! Stay connected with EEC by signing up for our free content at Or call us at 720-949-4906.






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