April 14, 2008

Shareholder Value vs. Customer Value: could a bit of marketing theory have prevented the Sub-Prime meltdown?

The relentless corporate chase of the new strategy mantra, the "Shareholder Value" (i.e. strategy is anything that will raise the stock price and the value of the management stock options) reached its apotheosis during the recent months when one of its upshots, the infamous Sub-Prime Mortgages market, collapsed. Sub-Prime Mortgage is a populist social policy in the US: sub-prime mortgages so everyone can buy a house, even those without any income to pay back. In fact sub-prime is nothing than a euphemism for customer acquisition i.e. more production by entering a new market segment, more profit and more “Shareholder Value”. The meltdown of this market sent the international financial markets in a tailspin and has brought the world economy at the edge of recession.
The quality of corporate governance and the strategic choices of important institutions should become again an issue of political scrutiny and hopefully an issue of research. Like most crises of the last 15 years financial institutions, the shadow banking system of speculative traders and some rating agencies (rating bonds of questionable quality with AAA) seem to have played also a decisive role here; in a funny way though financial institutions were again the first
victims of the crisis.
With the equity markets in a state of paranoia, big caliber players in the red, hedge funds evaporating, property prices crushing and the world economy in crisis the 7 G officials decided finally to “
call for more bank regulation to prevent global slump”. No one would disagree that more regulation is necessary so that some financial institutions stop behaving like gamblers out of control. What would help also would be if bankers – and other financial institutions - were reminded from time to time that since it is their customer’s money they risk with their speculations and irresponsible “investments” (who could imagine that so many brains would invest so much in sub-prime) it is maybe the Customer Value they have to rediscover again as their new business paradigm. If they do not know what the term means I would advice them to open the Marketing textbook they have kept from their student years.