A glass exists to hold water. A company exists to serve its customers

By George ILIEV
CorporateNature Metaphor Series, No 104

A glass full of water is a container that makes a valuable liquid useful and accessible. Sometimes people collect glasses for the sake of the glasses themselves, e.g. to put them in a display cabinet of Waterford Crystal. But most of the time glasses, cups and pots exist to serve a higher and more useful purpose.

Metaphorically, companies are glasses and cups while their business activities are the useful liquid they contain inside. 

Before the 2008 Global Financial Crisis, most economists agreed with Milton Friedman's 1970s theory that companies exist for their shareholders. Back then, the key objective of a company was seen as generating shareholder returns, which was akin to believing that a glass exists for its own sake.

However, ever since the 1970s, Peter Drucker, the father of management, has maintained that companies do not exist for their shareholders but for their customers, so the primary objective of a company is to be useful to its customers. This is akin to maintaining that the glass exists to hold a liquid.

The financial crisis has ultimately shown that Milton Friedman was wrong and Peter Drucker was right: the glass exists for the liquid inside, not for the melted and strangely-shaped quartz that makes up the glass itself.

Glass of water (Source: Wikipedia)

Тhree reasons why the tail wags the dog in shareholder and predator-prey relationships

Predators and hostile takeover funds use leverage and aggression to take control
George ILIEV

(Shark in the shallows, Whitsunday Islands, Australia, 2012)

It is often the case that smaller size predators come on top of larger prey in the food pyramid, just like minority shareholders often control large corporations. There are at least three types of factors that underlie this phenomenon of "the tail wagging the dog" in nature and in the business world.

1. Pre-programmed aggressive/activist behaviour.
2. Access to leveraging tools.
3. Diffuse reaction of the target of control.

1. Whereas the lion has an instinct to hunt zebras and antelopes, no zebra would feel an urge to chase lions. (Though jays and meerkats are known to attack their predators.) By the same token, shareholders who want to control a corporation are, by and large, aggressive and activist investors who have done this multiple times.

2. Just like the lion has teeth and claws, activist shareholders have access to leveraged finance (bank loans) and privileged information.

3. Prey rarely organise themselves to defend against a predator. In a similar way, the diffuse ownership structure of a corporation may allow a small shareholder to gain effective control of the whole entity. A case in point is Marco Provera, who controlled Telecom Italia in the early 2000s by leveraging his stake 26-fold. Worldwide, 737 top shareholders have the potential to control 80% of all Trans-national corporations around the world, the same TED talk shows.