Shareholders or Customers - Do you have to choose?

Is your primary obligation to shareholders or customers? Can it be both?

I have had a few interesting conversations this week about fiduciary duty. OK, none of the conversations actually included the phrase “fiduciary duty”, but they did have me thinking about that concept. You know, that a CEO and Board’s duty to act in the best interest of the company and the shareholders. And since I view a Product Manager as a “mini-CEO” of their product or P&L, the same duty of care should apply to them, right?

Basically, that fiduciary duty ensures business leaders use investor’s capital wisely and with integrity. Even if you are not a CEO or Board Member, your shareholders might be the finance department or a General Manager who is holding you accountable for monthly financial results. To be clear, all good stuff. But where I think it has the risk of unintended consequences is when leaders get overly focused on the things that typically get measured in those shareholder reports and forget about the customers.

Which brings me to NPS - that Net Promoter Score℠ metric that people love to report on. And again, NPS measures whether your customers would recommend you or not, and is a great proxy for how well you are serving your customers. But if you measure NPS, do you change anything based on that measurement? What do you do with it?

Fred Reichheld invented the concept of NPS, and a few years ago he wrote a book called “Winning on Purpose - The Unbeatable Strategy of Loving Customers” that I personally put up there with Jim Collins “Good to Great” (see my first newsletter post to see how that inspired this blog). In this book, Reichheld introduces a new concept called Earned Growth Rate (EGR) to measure how much a business grows due to customer loyalty and referrals. He also shows a strong correlation to NPS and shareholder returns, demonstrating that companies with the highest Net Promoter Score℠ in their industry have delivered over 2x the returns of the stock market overall in the last decade. Whoa.

So is it possible that a focus on customers first is actually a better way to demonstrate fiduciary duty than focusing primarily on shareholders? I’ll let you decide, but to help you maybe I’ll share some personal experience. In one of my P&L roles monthly reporting rhythms when we were at a pretty critical point of trying to drastically improve the profit and cash flow profile of the business, we made a drastic change to our our monthly reporting structure. Where we had historically begun the monthly metric reviews with traditional financial metrics - monthly sales, revenue, margin, etc… - we began starting the review with customer focused metrics. How well did we meet our SLAs, what was our on-time delivery rate, which key customers did we not meet our obligations to that month.

Only after spending time on those customer metrics did we make our way to the more traditional financial metrics. But starting with that customer focus changed the entire dynamic of the rest of the review, and how we discussed the impacts of those metrics and what they were telling us.

Coincidentally (or not?), that year that we switched to reviewing customer metrics first happened to also be the first year that a lot of our financial metrics made a huge swing from red to black, the value of the business nearly doubled, and was the first year of multiple double digit growth years.

So was that coincidence, or was it Earned Growth? Does fiduciary duty to shareholders actually imply prioritizing customers first?

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