Question about customer vs shareholder value

January 27, 2018 10:11 AM

Why does it seem companies behave as if investors are more important to them than customers? From what I see of stock prices, if investors feel a company is losing customers, stock price falls.

Doesn't that mean the transactions of customers and the money they provide a company for its goods and services must be at least as important as the share price investors pay to buy company stock? Or is the dollar for dollar value of shares over purchases so much more that companies don't care what customers do as long as shareholders are happy?

posted by CollectiveMind to Work & Money (7 answers total)

Shareholders own the company, so management works for them, so fundamentally what the shareholders want, or are perceived to want (more money now) is most important.

Now, long-term, yeah, happy customers should make a stronger company. But often management doesn't think long-term.

There's also some risk that if the share price drops too low, the company could become a takeover target and employees (even managers!) might lose their jobs.
posted by Huffy Puffy at 10:57 AM on January 27, 2018 [2 favorites]

Customers (and their desires) are also somewhat more of an unknown (and fickle) than shareholders. If you can show shareholders you've cut costs by X, they will (generally) be happy (even if this will actually have negative consequences down the line!).
If you invest tons into new product development or improving your widget, there is still no guarantee customers will buy your widget. Companies are risk-averse.
posted by ClarissaWAM at 11:56 AM on January 27, 2018 [1 favorite]

How the cult of shareholder value wrecked American business

The funny thing is that this supposed imperative to “maximize” a company’s share price has no foundation in history or in law. Nor is there any empirical evidence that it makes the economy or the society better off. What began in the 1970s and ’80s as a useful corrective to self-satisfied managerial mediocrity has become a corrupting, self-interested dogma peddled by finance professors, money managers and over-compensated corporate executives.

posted by Thella at 12:06 PM on January 27, 2018 [5 favorites]

Oversimplifying: from an executive's standpoint, they have a duty to shareholders that they don't have to customers.

Of course treating customers well is one way to keep a share price high, but if there are other ways that cost less and/or are more effective, executives see themselves as duty-bound to pursue the other options.
posted by kevinbelt at 12:26 PM on January 27, 2018

Shareholders own the company and control its senior management. C-level execs are therefore more focused on the immediate wants of the majority shareholders, who control their bonuses and jobs, than nebulous, unfathomable customer needs.

Shareholders want profits and thereby dividends, and a big increase in the share price, which makes their stake in the company more valuable for when they sell it. They are interested in the customer as a means to that end.

Of course customers are vital. But the pressure rarely comes directly from them. It might filter up if there’s a big scandal or significant declines in sales.

But the owners will always be a bigger influence on the management.
posted by NoiselessPenguin at 1:06 PM on January 27, 2018

Perhaps this is almost too obvious to point out, but executives almost always are shareholders as well - receiving stock (or stock options) as part of their compensation. Part of the reason companies issue stock to their key employees is explicitly to align their interests with those of shareholders.
posted by kickingtheground at 12:36 PM on January 28, 2018 [1 favorite]

There's also the broader problem that capitalism tends to eat any company that doesn't ruthlessly maximize its own value relative to other companies. A company could magnanimously decide to treat its customers like kings or to pay its own workers living wages, but if they are in tight competition with other companies that do not do these things the magnanimous company may find itself at a competitive disadvantage and eventually go under. It's not a given, but the entire system definitely discourages companies from doing the right thing when it conflicts with this quarter's bottom line. This is especially true of modern American capitalism where shareholders are seen as the only legitimate stakeholders and other stakeholders like customers and employees are ignored.
posted by Tehhund at 1:43 PM on January 29, 2018