Circle of Hell


The pursuit of shareholder gains is destroying productivity and taking the West down with it, writes Professor Charles Hampden-Turner

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Giving all power to shareholders and insisting that their profits be maximized is a serious error. It is greatly slowing economic growth, and costing the West its world leadership. It is a vicious circle. Instead of giving shareholders their share of common efforts, it tries to guarantee their income in advance. This fundamental mistake has disastrous consequences. Let us examine the problems with this Circle of Hell, starting with point one.


There is at this point no way of knowing in advance what shareholders ought to receive since the work has yet to be performed. If you set a target based on last year’s performance, then any gains for shareholders can only arise from cutting segments two to six (see graphic p59), rather than supporting the success of these segments. Thus cost is driven out by attacking the latter five stages of the circle. Shareholders can only be certain to gain if other stakeholders are certain to lose. Some of the monies and resources those stakeholders were earlier receiving must go to shareholders instead – thus productivity decreases and quality falls.


By holding down wages by claiming employees are ‘self-employed’, by avoiding sickness and vacation pay, by cutting back on training and development, by regarding people as ‘fixed units of labour’, by moving to cheaper wages abroad, by threatening to outsource if higher wages are demanded, you move money from the pockets of employees to the pockets of shareholders. This is why share prices jump when redundancies are announced. Yet the fundamental paradox of the Circle of Hell begins here. The evidence shows that frightened employees are less productive. Shareholders receive the monies once paid in wages as an upfront sugar rush. But the energy within the company is already critically compromised.

Such trends are self-fulfilling. If work is insecure and harsh, then staff turnover will rise. If turnover is high then training and development monies are wasted on labour that is temporary, so why bother? You cut back on R&D because few stay around long enough to benefit, and it takes many years for such investments to pay off if they ever do, by which time the decision-makers will have moved on too. In order to retain knowledge you have to retain and nurture people who know – but there are few signs of that happening, so learning and knowledge suffer.

Extensive rustbelts have appeared in the US in places like Ohio and Michigan, with more and more skilled blue-collar work sent abroad and a gathering hatred of globalization. The rise to the presidency of Donald Trump is a symptom of this burgeoning anger. But it is not globalization per se that is the problem – China is prospering. It is low investment in employees, so shareholders extract more, which is behind the malaise. Making employees feel fearful rather than ambitious and well-resourced lowers productivity and quality. Until you give them the resources, you can never discover
how well they might have done with more support.


The weakness of shareholder capitalism is that the industrial ecosystem that creates wealth consists not just of the shareholders of the large customer, but shareholders of hundreds of companies that make up the supply chain and some of the customers’ companies. They are all seeking to maximize their take, and are therefore more enemies than friends. What happens is that the large customer tries to claw back the resources of suppliers into their own coffers. This is done by direct threat – “lower your price or lose the contract” – or, more often, by getting suppliers to bid against each other and then accepting the cheapest tender. At first blush, this seems rational. The most cost efficient company wins! Yet the pitfalls are manifold.

Competition assumes that quality is identical in all cases. All bidders for the work are providing the same widget. This is rarely the case. The lowest bid may be the lowest because quality is lacking, safety has been ignored, workmanship is inferior, and materials substandard. While it is efficient for the customer to get ten tenders and choose one, it means wasting the time of nine unsuccessful bidders who will have to get their money back somehow! Quality may not be visible on the surface. You do not know by what doubtful means money was saved. If you keep changing your supplier he cannot learn from you or deepen the relationship or anticipate your need or solve your problems. The specifications will tend to be simplistic in a world growing more complex by the day. If you make your supplier desperate, he may do desperate things rather than go bankrupt. These could harm you both. He will yield to pressure for the time being, but leave you as soon as he finds a customer less hard on him. The best suppliers will not put up with such tactics so you risk ending up with the worst ones. GM clawed $4 billion back from its suppliers and distributors in the 1990s but was bankrupted by
the recession of 2008. It had lost its
best partners.


Business success rests not on what a company wants to sell, but on what its customers want to buy. Yet most marketing is a pseudoscience of unilateral manipulation – getting customers to do what you want them to. To sit in a marketing meeting is to imagine yourself on a firing range and scoring direct hits on consumers. The candy in the supermarket is at the eye-level of a seven-year-old child. Companies prefer to target customers as if they were the quarry of some chase and sell them products with the highest mark-up and, for that reason, often the lowest net value. Such a process is extremely wasteful. Advertising works best in situations of ‘low-commitment purchasing’. When we do not care one way or another, we are more easily influenced. But this steers the whole industry towards what is least important, most superficial and trivial, and away from products which significantly improve our way of life. Apple’s iPod did not need to be advertised. Queues formed around the block before it was launched. It is the trailing edge of technology that gets blasted into our ears and is endlessly repeated.

The attempt to make as much profit as possible with incentivized high-margin products ends up reducing both revenue and satisfaction, and amounts to a net transfer of funds from customers to shareholders. It erodes the trust between buyer and seller if the first seeks to take advantage of the second.

Another major problem is that a company trying to maximize market share is always going to fight harder and endure longer than one trying to maximize shareholder gains. It is an easy matter to take the profitability out of an industry. You have only to cut prices. Even as the profit-driven company is thinking of quitting, so meagre are profits, the company trying to increase its market share of customers is rejoicing. It is satisfying more and more people. Companies like Amazon and Alibaba made losses for years, ramped up market share – and are now worth billions. The new platform companies like Uber, Airbnb and the Haier group go for customers first, and aim for profits down the road.

Three major attempts have been made to define business excellence over the last 35 years, and two of these put profits first. The first was by Tom Peters and Robert H Waterman Jr in their classic book In Search of Excellence. The second was by a team headed by Jim Collins in From Good to Great. In both cases very profitable companies were chosen. But, in both cases, most of those same companies greatly underperformed in the decade following their coronation as “excellent” and“great”. Why would this be? Could it be that high profitability takes too much money out of an organization and puts too little back in again? Customers eventually realize they are being taken advantage of. The “great” companies actually lost money between 2009 and 2015. In contrast, a third study of excellence, Conscious Capitalism by John Mackey and Raj Sisodia, concentrated on companies customers loved. These not only fared very much better than the Standard & Poor’s 500 average, they gained year-after-year so that after 15 years they were six times more profitable than the S&P 500 mean. Profit is like happiness – chasing it is likely to fail. Think of the customer foremost and it will manifest as if by magic.


The truth is that much of nature’s bounty comes to us as ‘free’, yet is infinitely precious. When we pollute and destroy it then losses will be considerable, and will become apparent decades after the profits were banked. We need to harmonize our business cycles with natural cycles: the oxygen cycle, the hydrogen cycle, the water cycle, the rock cycle and the lunar cycle. If we harness the energy of the moon which draws tides in and out, then we have a priceless source. As for the sun, it is a great fusion reactor in the sky. The energy is free, but not the means of harnessing it. Once we do harness it, costs will only fall in perpetuity as our skills are honed and we learn to capture more and more.

There are huge gains for all stakeholders in people and planet working together in prosperity, yet, in the meantime, cleaning up the environment is a cost which profit-oriented shareholders are often reluctant to meet. They attack legislation, not the problem, and lobby against our long-term survival. But on the far side of this expense the opportunity to fit far more finely and effectively into our habitat is highly promising. A garden on the flat roof of a company is not only for recreation, flowers, fruits and vegetables. It also captures solar heat, makes the roof last longer, is cooler in summer and warmer in winter, turns carbon monoxide back into oxygen, breaks down carbon dioxide from traffic below and could turn cities into green lungs for the Earth. But first we need to raise our eyes from next quarter’s bottom line.


Companies have no problem taking from governments – contracts, research money, university education, the courts, export guarantees and the like. Some have a great deal of trouble giving back – paying their fair share of taxes. If you have a sacred duty to maximize shareholders’ returns, then this involves fighting your own democratic government every inch of the way. In many cases the economies of multinationals are larger than whole nations and they have the means of passing money in endless circles around the globe from tax haven to tax haven and locating intellectual property in the most unlikely places. They force nations to compete in giving them tax-breaks, and are especially tough on poor nations, locating plants there only if all taxes, safety and environmental regulations, and protection for work forces are waived. Profit is the sole concern and all other values are for the shredder. The problem with this is that the world economy is increasingly knowledge-intensive. Affluent nations especially need to innovate and become increasingly complex. This will require education on a massive scale, and depriving governments of the means to generate knowledge for their societies is a serious disadvantage. China is turning out many times the number of scientists and engineers in its educational system, which is free. There is a very real danger that the West will be out-thought.

The world outside the circle

The Circle of Hell is a system with six interdependent segments. It is a well-known principle of systems theory that unilaterally increasing any single element in a system will ultimately destroy the whole system. This is a devastating indictment of maximizing shareholder gains, which even Jack Welch of GE described as “the dumbest idea in the world”.

The more you look to the long-term, the more time you have, while “more profits now” looks to the short-term and fails to understand that you must first develop fellow stakeholders so that they are more productive and innovative. For example, if you increase your market share now, then profitability can follow years later. If you nurture suppliers now, they will grow to serve you better and boost your revenue. If R&D is increased now, innovation can follow in years hence. If you reduce waste in your factory, you leave fewer profits on the floor of your factory and bring more benign products to customers. We might expect more successful economies to be long-term and self-restrained. That is just what we find.

Nations which have developed very fast like China, South Korea, Hong Kong and Taiwan tend to the long-term and are self-restrained. The Chinese call this “The Long March”, after Mao’s successful civil war. Those who give all power to shareholders are self-indulgent and short-term. In as far as sense can be made of the strategies of Chinese companies, they seem to aim for market share (or customers) first and then restore these acquisitions to profit later (see graphic left). Just as the Japanese once invaded the US car market with low-profit sub-compact cars, so Lenovo bought IBM’s loss-making PC business which added to Lenovo’s world market share, especially within China. Its profit margins were as low as 1% and 2% when not plunging into the red. Haier, the Chinese white goods supplier, bought a string of unprofitable white goods companies and imposed higher quality standards on them. Its boss, Zhang Ruimin, famously took a sledgehammer to defective refrigerators while inviting his employees to do the same. His sledgehammer is lovingly displayed in a local museum!

Geely, the Chinese carmaker, bought loss-making Volvo from Ford. In all three cases, more customers and market share was the aim. In two cases, world-famous brand names were acquired, and a mix of continuous improvement and the size of the Chinese domestic market restored these to profitability, once the losses were absorbed and reversed.

Perhaps the clearest case of a willingness to wait for profits instead of an insistence on profiting now was the battle between Alibaba and eBay in China. American eBay imposed a tariff on all those merchants and consumers using its platform, so that indignant users called it “FeeBay” and “GreedBay”, while Alibaba allowed transactions to be done for free. In a catastrophic misunderstanding, Meg Whitman, chief executive of eBay, congratulated her company on “forcing” Alibaba not to charge users, believing this to be a desperate expedient leading to imminent failure. Instead it was eBay that failed, losing the 80% market share it had gained by acquiring EachNet, while Alibaba received $25 billion from investors in its Wall Street IPO. eBay, Yahoo and Google each failed to grasp that China was different and stakeholders were sovereign there. Jack Ma of Alibaba put it succinctly: “Today is brutal and tomorrow is even more brutal, but the day after tomorrow is beautiful.” Investors must hang in there and wait.


Professor Charles Hampden-Turner served 18 years at the Judge Business School at the University of Cambridge, UK. He is now with KPMG, for whom he is creating a Wealth Creation Index