Is Jack Ma’s Priority of Customers, Employees Then Shareholders Correct?

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“Jack Ma 2008” Copyright World Economic Forum (www.weforum.org). Licensed under Creative Commons Attribution-Share Alike 3.0-2.5-2.0-1.0 via Wikimedia Commons

“Customers first, employees second, and shareholders third,” wrote CEO Jack Ma in a letter to investors in advance of Alibaba’s record-breaking $25 billion IPO.

He explained his reasoning behind this during an interview at the AllThingsD (now Re/code) conference in 2012: “If the customer is happy, the business is happy, and the shareholders are happy.”

Is this the right prioritization? I think it depends on the stage of the company. Having a balance is key, but companies naturally focus on different groups at different stages.

Early Stage: Employees First

When a company is first formed, there are often no customers to worry about. Employee concerns tend to take precedence in the CEO’s mind, because he knows everyone well, and they can all fit in a small room. He’s trying to build a team and has no operational redundancy, so it seems critical to keep every employee happy and productive. The only thought CEOs give to shareholders is whether they have provided enough money to make payroll.

If the CEO is smart, he or she has created a product based on an analysis of what potential customers want, so the initial offering is designed to fill unmet needs. Belief in the product is the extent of consideration for the customer.

Growth Stage: Customers First

Over time, if the company is successful it will reach a growth phase during where it adds customers rapidly. With this new attention from customers, many companies will begin to focus strongly on them. Variations of the slogans “the customer is always right” or “the answer is always yes” will become common, and stories about employees going out of their way to meet the needs of customers are celebrated.

However, if the balance goes too far in this direction, CEOs end up with issues of employee burnout and low profitability (poor shareholder return), as no expense is spared to treat customers well. In addition, some companies allow their largest customers to have undue influence on their product development process at the expense of including features and services that may serve a larger market need.

Showing Results: Shareholders First

Finally, as the company achieves more economic success, the shareholders will begin to press for plans and actions that deliver a return on their investment. Even in companies that are bootstrapped, the founders will eventually need to recognize returns from their efforts.

For companies that make it to the public markets, the pressure for shareholder return often becomes all consuming and very short-term focused. If you spend time within most public companies, you’ll get the sense that decisions are made based almost solely on their impact on earnings in the current quarter and year. Customers and employees are sacrificed at the altar of making the quarterly number.

Although this shareholder-focused approach will initially show financial results as the emphasis moves away from customers and employees, the business will begin to erode. A few quarters of good performance turns into a death spiral of dissatisfied customers and unmotivated employees.

Achieving Balance

I consider the balance of these three constituencies so important that I devoted an entire chapter to it in my book “The CEO Tightrope: How to Master the Balancing Act of a Successful CEO.” It’s critical for the CEO to understand the natural pressures that exist in organizations as they mature and to balance these pressures in the company’s decision-making process. Everyone in the company should consider the interests of all three constituencies when making decisions. It will be interesting to see if Ma’s prioritization of the customer and employees over shareholders shifts as Alibaba deals with the pressures of the market.

How are you balancing customers, employees and shareholders?

  1. Have you made a decision in the past six months designed to keep either employees or customers happy, even though you doubted the long-term wisdom of it?
  2. What stories or proof of success do you share at meetings? Is there a particular focus on either customer service stories or on financials?
  3. Do you neglect training for employees because you can’t calculate the return on the expense? Do you try to keep your salary expense as low as possible?

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