Brief Comments on "Taking Business Seriously"

This issue of the International Journal of Business, "Taking Business Seriously" presents an overview of issues relating to why businesses underperform, and suggests various ways to improve corporate performance along with optimism that "proper scientific evaluation" might overcome biases in current strategic management thinking. The following review of these issues and concepts come from a financial vantage point. From a finance perspective there is only one primary objective of an enterprise--namely, maximize the long-term wealth of the owners! In order to take business seriously we need to go back to the basics. The key is to recognize that the objective of all firms is to maximize long-term wealth of owners. This objective recognizes and incorporates all stakeholders, from employees, suppliers, and customers to social and environmental responsibilities, and last, but certainly not least, the owners of the firm (holders of common stock). Of course the objective is confounded by agency questions and costs, concern over whose wealth the Board of Directors [BOD] and management is maximizing, and are all stakeholders being treated fairly. From this vantage point, the articles contained herein are briefly reviewed and a summary presented. Richard Franke in the introduction lists various domains, problems and opportunities relating to problems in strategic management and empirical tests thereof. He concludes that with improved empirical techniques it is possible to explain most of the variability in corporate performance, and if implemented properly strategic management could contribute positively to corporate performance. John Grant cites and presents a list of various strategic management frameworks, anecdotal evidence, and research challenges. He further notes that strategic management faces a moving target, and, if strategists from different sectors collaborate, improved research and understanding are possible. Bernard Bass presents a laundry list of anecdotal evidence regarding top management successes and failures. He recognizes the strategic importance the CEO and other senior executives play in a dynamic environment where many stakeholders need to be satisfied. While he notes agency theory, he does not include the assumption that owners (shareholders) control the BOD, nor the difference between profits and wealth maximization. In his article he says " ... the CEO ... learns who are the most important stakeholders." There should be nothing to learn. The BOD and the CEO should know that the most important stakeholders are the owners of the firm. The fact that something needs to be learned shows a weakness in current strategic management thinking. A possible way to reduce agency problems is to have the compensation of top managers configured as a base salary with bonuses based on financial performance. For example the maximum base salary of any manager should be $2,000 per hour [given a normal work year of 2000 hours this translates to a $4,000,000 annual salary, certainly a livable wage for the vast majority of people]. The bonus would then be constructed to reward both short-term profitability and long term-wealth creation, with the emphasis on longer term aspects. Obviously ethical behavior should be expected along with fair treatment of all stakeholders. Franke and Miller provide a critical review of investment-economic performance and find that more capital investment does not seem to contribute to higher national economic growth or higher corporate profitability. From a finance perspective this result is not surprising in light of efficient markets, and the recognition that "excess profits" are not low hanging fruit. Bigger is not better; instead more effective utilization of current resources, from capital to human resources, leads to better economic performance--which is exactly what Franke and Miller found to be the case. Efficient markets indicate that excess profits equal zero, especially over a larger group and in the long-term, because arbitrage and competition reduce/eliminate any excess profits. …