Introduction to Principle Three

Quick Summary: Defining an acceptable return will vary from one investor group to another.

Abstract:

Companies need investments in three categories, time, talent, and capital to succeed.  These investments come from four sources; employees, business partners, customers, and financial investors.  Companies must address the specific needs of each of these groups and ensure that all receive an acceptable return on their particular investments as each group individually defines success

It is hard to argue that the first principle of “Staying in Business” and the second principle of “Treating All Individuals with Dignity and Respect” should be ranked lower than their number one and number two positions.  The initial reaction to ranking “Provide an Acceptable Return to All Investors” as the third principle may seem to be out of place.  However, without investors, no company, non-profit organization, or government agency can survive. 

At first glance, this principle may seem to apply to the company’s financial investors.  It does, but financial investors only rank fourth in priority.  Three other groups all invest heavily in the company and their investments are far more important than those of the company’s financial backers.  All four investor groups have many other investment opportunities that they could pursue.  If they chose your company, it is primarily based on the fact that they believe that their investment in your company will provide an acceptable return, as they have defined it.  Understanding what they define as an acceptable return is crucial to help to ensure that they will be satisfied.

The term “acceptable” in this principle was selected instead of “outstanding” or “superior” or some other more superlative adjective.  Of course, all investors want to see the company provide far more than acceptable results, again, as they define them.  Unfortunately, as described in articles in Chapter Two of this collection, company success is the exception.  The reality is that most companies, over the long run fail.  Even considering this bleak fact, investors still decide to invest, reflecting their confidence that the company will buck the odds and will be successful.   In essence, they are betting that the company will be a winner.  With this show of confidence by them, the company has the obligation to do whatever it can, without violating any of the Seven Principles, to provide, at least, an acceptable return, and hopefully, exceed the investor expectations. 

The most important group of investors is the company’s employees who are investing their time.  Time is a commodity that cannot be recouped.  Every hour of every day that every employee spends working at the company is an increment of time that cannot be spent somewhere else.  There are no time “do-overs”; what time is spent is spent.  Not only are employees investing time, they are making an emotional commitment as well that will bleed over to all other aspects of their lives.  They cannot help but become emotionally involved.  The time spent at work is the largest single activity that they are involved in.  In almost every case, employees internalize the company’s success or difficulties. 

The second group of investors are the company’s business partners who allocate resources to the company and help them serve the third group of investors, their customers.  Business partners always have choices and have to decide when, where, and how to allocate their resources.  By choosing to work with a specific company, they are essentially choosing not to work with others.  They are “doubling down” by choosing to work with you as opposed to someone else.  If the partnership is not successful, like employees, they cannot recoup time and may not be able to recoup any of their other investments.

Customers, the third group of investors, invest in the company by putting their trust in them and purchasing their goods and services.  In many cases, customers have customers.  If the purchased goods or services do not meet their needs or the needs of their customers, they will suffer the consequences.  To a very large extent, a customer’s reputation is based on your performance.  In many cases, the cost to change suppliers can be very high and have long-term impacts. 

Only if these three groups of investors are satisfied will the final group of investors, the financial investors, be able to receive an acceptable return.  As discussed in the article in this series “Company Success Versus Realized Investor Returns”, investors are focused on making money through their investment.  Their goal may not be consistent with the longer-term goals of the other investor categories.  This is not a judgmental statement, merely an observation.  Financial investors make investments to make money for their investors.  They do not invest in companies to make them successful in the long run.  Obviously, without some level of company success, financial investor returns will be difficult to achieve.  So, the company must focus on helping financial investors achieve an acceptable return while still taking into account the goals of the other investor categories.

Clearly, the four investor categories are all interrelated, and a circular argument can be made regarding which category comes first, second, third, and fourth.  In the final analysis, it does not matter.  Think of the four categories as legs of a table; all four must be available, solid and work together to maintain stability.  It is critical to remember that each category will define “acceptable return” differently.  Ensuring that all four reach their goals is the only way for the company to remain stable and not collapse as would occur with a one, two, or even three leg table.

Article Number : 2.040102   

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