The greatest myth of the last decade is that CEOs who run their companies to maximize shareholder value actually serve their investors well. In truth, by running their businesses by the numbers in order to get the stock price up, and thus attempting to please their shareholders in the near term, these leaders are putting their companies on a course to long-term decline or even eventual destruction. Business’s best-kept secret is that mission-driven companies accrue far more shareholder value than do financially driven firms.
When I joined Medtronic Inc. in 1989, it had a market capitalization of $1.1 billion. I asked a senior board member what would happen if a raider were to offer our shareholders $2 billion for the company’s shares. Reflecting on the shareholder pressures at the time, he said reluctantly, “We would be gone.” To which I responded, “Then the board must not believe in the value of the company’s future prospects or its mission.” Right then, I vowed to myself to build on the Medtronic mission to create such a valuable company that it could not be taken over.
That mission dates to 1962, five years after Medtronic founder Earl Bakken invented the pacemaker, when the company was near bankruptcy. At the time, Mr. Bakken, urged on by his board of directors, wrote Medtronic’s mission: To restore people to full life and health. This mission inspires employees to do superior work with dedication and passion — when they share patient stories, when they challenge one another to ensure that the quality of Medtronic products is high enough, when they think about new inventions. Leaders regularly refer to the mission before making strategic decisions.
This has led to spectacular results for patients, career opportunities for employees, and a dramatic rise in Medtronic’s shareholder value. From 1985 to 2003, shareholder value grew at a compound annual rate of 32 percent. Today, Medtronic is one of the 30 most valuable companies in the U.S.
When raising the stock price is the priority, it takes precedence over considerations of marketplace competitiveness and customer satisfaction — crucial elements for building value over time. And when top management runs out of options to immediately increase shareholder value (which it usually does), it tries to restructure to achieve financial goals. Nonstrategic acquisitions, divestitures, consolidations, layoffs, and cutbacks generally follow. By the time such restructuring is done, the corporation has lost its capacity for growth. Meanwhile, impatient investors won’t give the CEO the time needed to revive the business. Instead, shareholders press for a change in leadership, or even the sale of the company.
But the worst failing of being financially driven is that such a culture doesn’t rouse most people to strive for exceptional performance. Granted, a few top executives have the promise of substantial wealth motivating them. But they’re only a small fraction of the organization. Financial incentives are far less meaningful for the majority of people who design, manufacture, and sell products and services.
In my experience, getting employees to feel a sense of purpose beyond making money is the only way for a company to consistently deliver innovative products, superior service, unsurpassed quality, and, ultimately, shareholder value. Eventually, competitors can copy an innovative idea for a product or service. But an organization of highly dedicated people — who work into the night to accelerate the introduction of an important new product, or respond on a weekend to a customer’s urgent call for service — is hard to duplicate.
Furthermore, employees who place a high personal value on their work are remarkably resilient, even when cutbacks and layoffs are required.
Is this ability to create a meaningful mission limited to companies like Medtronic that are in the business of saving lives? Not at all.