Ceo Principle

A rule of thumb for a business organization. Decisions should take the entire organization into consideration: Customers, Employees, Owners.

And if there are conflicting needs? I'm suggesting that the prioritization should be:

Customers
Employees
Owners

-- RobMyers

A recent, real-world example of this is Hyperion's offer to give $5k to each employee who buys a hybrid car:

http://www.usatoday.com/money/autos/2004-11-29-hyperion_x.htm http://webreprints.djreprints.com/1124850658752.html

Is this bad for business? Customers and stockholders alike have praised this incentive. And the free press alone is worth quite a bit. Wouldn't you want to work for a company like this? I would. I'd feel better about my job because of it. I'd also save money, which is like a little raise. (Personally, I've recently switched from a job where I put 3000 miles per month on my car to one where I work from home a lot, and I've put only 4000 total miles on my car during the last seven months. Had I stayed at the previous job, I would have bought a hybrid by now. I was spending $2000/year on gas, alone. I still want to buy a hybrid, but I'm waiting for a hybrid convertible! Preferably from BMW, of course.)

-- RobMyers 17Dec2004

This is illegal. Company officers, particularly the CEO, have an overriding responsibility to the stockholders, first and foremost, and theoretically to other aspects of the law above even that, although this seems to be honored more in the breech than in the observance.

Anyway, IANAL, but I believe that you'd need to have a not-for-profit charter (but not a tax-exempt status) to rearrange priorities like this. -- AnonymousDonor

It depends on the state you live in. In general, directors and officers have fiduciary duties to the corporation; though many state courts (such as in Delaware) have ruled that "shareholders"=="the corporation"--and that employees, customers, and the community have essentially no standing.

In other states (such as Oregon), directors may legally consider the community, the employees, etc. in making decisions; a director or officer who decides to not lay off folks can use this as a defense if some shareholder sues. Note that shareholders are still the only group that gets to vote on who is on the board in most corporations, and that directors/managers who neglect shareholders' needs and wants tend to find themselves unemployed...

I understand what you're saying. I'm not sure it's quite that cut-and-dried illegal as you suggest. If a CEO has no ability to steer the corporation, then she is just a puppet, and GoodToGreat would never have been written, because all the great CEOs would have landed in prison. The owners should not be second-guessing the leader of the corporation.

I'm not suggesting that the ultimate purpose of a company is anything other than making money for the owners. But I suppose I prefer privately held companies that strive to build some sort of corporate community. Not a socialist organization, but one that strives for long-term profitability. I believe that the benefits of providing excellent customer service and quality products almost always outweigh (in the long-term) the benefits of quarterly sales goals or a premature launch of the next buggy Beta version. It has been my experience that corporate officers who try to single-mindedly cut expenses and increase sales are short-sighted, and usually end up receiving the boot, themselves. (Of course, they're usually kicked out with a nice severance package that would sustain someone like me for 20 years. So there's quite a bit of incentive built in to do a half-witted job.)

My reasoning is that if you favor owners over employees or customers, you start a downward spiral for everyone.

Sure, and don't you think that's one of the problems with Western Civilization? That's already happened, long since.

Anyway, since you doubt my (anonymous, not-a-lawyer :-) understanding of the legality, you should get an expert opinion from an actual lawyer.

Presumably, like any of us, you won't actually bother, though, so meanwhile consider this: Stockholder lawsuits.

Let's say some CEO did as you suggested. Let's say the stock doesn't perform well. Let's say that stockholder lawsuits then get filed...as they always do. Do you really think that the CEO can defend himself by saying "it doesn't matter that investors in my company lost money, because making money isn't our primary purpose." Of course not; he would lose those lawsuits instantly with such a defense.

You're saying it's illegal for a publicly traded company to run itself using what management decides are sound, proven management principles? Ah, well, I prefer small, private investments, anyway. I'm suggesting that the most profitable equation is to do what is best for the customers, first. Then the employees, then the owners. That's assuming there's a conflict. The weird thing is that, if a perception of this principle is in-place, that conflicts rarely occur. Happy customers return, and happy employees work hard for the organization. Those things drive profits, which make owners happy. Having worked for numerous employers in such companies, and watching the owners become multimillionaires, I'd say it works. Having read GoodToGreat, I'd say it also seems to work for large, public corporations. My lawyer has better things to do than listen to me prattle on about the stupidity of corporate America as a whole. -- RobMyers

The question is whether you have investors of any sort or not. If you ask people to invest in your company, you'll have to promise them something in return, or else why should they invest in your company? They'd be better off keeping their money in a savings account if you're not going to make money for them.

So even if I'm wrong, and CEOs have no legal responsibility to shareholders (which is definitely incorrect), you'd still have the problem that either you'd have trouble getting investors, or else you'd have to contractually obligate to do your best to make money, and a similar result ensues.

All of that holds true for both private and public companies, except that there are more legal responsibilities for public companies, basically.

So basically you have to find a way to do it where you're not promising to give the best return on investment possible, and that's why I said "non-profit status"; this sends the message to potential investors loud and clear.

Note that non-profit is not identical to tax-exempt. The latter has huge legal burdens on how they may do business; it's a hard status to get. The former is pretty easy, and puts far fewer restrictions on how you do business, but you have to pay taxes. In short, it sounds ideal for your purposes. -- AnonymousDonor

This is like asking if the StockMarket? could somehow attach a company's stock's value to the company's products' value. WesternCivilization would unravel. -- AnonymousDonor

Okay. Well, let's take a look at some of the (not-so-skillful) ways that people have tried to do this in the past. Since traditional relationships are often antagonistic toward employees, many companies have tried to mix things up:

Make employees customers. Take a look at any department store that offers an employee discount. A surprisingly large percent of Dayton's (sorry, Marshall Fields) sales are directly attributable to employees and their families.
Make employees shareholders. (I'm fond of real shares, whether as a SMALL portion of my retirement fund, or as a bonus. I'm cynical about options. I would be instantly suspicious of any organization that offered me options.) Options, once exercised, are real shares. Of course, if the strike prices is three times the current value of the company's stock, options aren't quite such a good deal...

Being suspicious of an organization just because it offers options makes no sense. Options may or may not be worth anything, and you should always consider every detail, but there's nothing inherently bad about options. There are many kinds, many circumstances, and options are the primary way that people in Silicon Valley have gotten rich.
I suggest some library research on the kinds of options, when they make sense, when they don't, etc.

So when it comes time to announce some bad news to the employees, we can remind them that they'll benefit in some extremely tiny way. This we call "spin," right? Usually the bad news ("20% layoffs in all departments") has greater impact than the good news ("we think the stock price will go up by 20% over the next year"). Yeah, unless your disgruntled employees start slacking off or (more likely) start making mistakes due to their increased work-load.

I'm not a socialist. I understand why a work-force may need to be cut. But after watching my old employers go from good to lousy by setting up their own TalentPump, I've come to the conclusion that what will best serve shareholders in the long-term is an organization that recognizes and fulfills certain needs of the work-force.

-- RobMyers

"what will best serve shareholders in the long-term..."

See, that's another problem. Only a minority of shareholders are interested in the long-term. Investors are more commonly interested in short-term profits. Remember that investors want a return on their money. If they'll make more money over the next two years by putting their money in a savings account, why should they buy your company shares? Because you promise better than a savings account over twenty years? That's a long time; if you can't do that well over 2 years, why think you can over 20? Etc.

I would disagree with your statement that "Investors are more commonly interested in short-term profits." We call those speculators, or day-traders. Large investors (institutions, and individual investors) are traditionally in for the long term. That whole late-90's DotBomb fiasco was a tiny blip on the market radar. YOU may have struck it rich, dear AnonymousDonor, but most people don't. (I recently heard that 60% of Americans expect to be rich someday. Since about 2 to 5 percent actually make it, historically, that means over 50% of the population is delusional.) -- RobMyers

One suggestion that came out of the book TheDivineRightOfCapital?, is to present a balance sheet with payroll on the profit/equity side of the equation, rather than on the expenses side of the ledger.

The standard balance sheet equation is

 Profit := Revenues - Expenses

Expenses can be broken apart into payroll and non-payroll expenses, thusly:

 Expenses := Payroll + OtherExpenses?

Doing a little algebra, we find:

Profit + Payroll := Revenues - OtherExpenses?

Assuming the economic benefit of a corporation is the sum of what it returns to its investors (profits; we'll ignore retained earnings) and to its employees, we have

EconomicBenefit? := Revenues - OtherExpenses?

I'd love to see that on a corporation's SEC filings...

-- AnonymousDonor

False assumption; the employees and the investors have exactly opposed interests (economically). The employees want all the money (salaries as high as possible, for instance), but so do the investors. Your assumption is that their interests are aligned and common, which is false. -- Dueling AnonymousDonor

Not necessarily. While they do compete in how to divide the pie; they need to cooperate in making that pie as large as possible. It's well-known that organizations where there is trust between management and the workforce tend to perform better than those where they are at each other's throats. And from the point of view of the community - which charters corporations in the first place - what are the purposes of a corporation (or what ought they be, at least?)

Provide products and/or services that are beneficial
Provide jobs
Provide income for investors

There are many businesses out there where labor and management do get along - these businesses tend to thrive.

-- AnonymousDonor

You misread what I said, and answered on issues of labor and management. Look again. I was talking about labor versus investors. -- Dueling AnonymousDonor

CategoryCoding