This week I had an interesting conversation with my office mate, Peter Tunjic, about innovation. Peter likes to point out that most management theories are like the Emperors new clothes – and there is usually a competitive advantage in questioning and rejecting the theories.
Apple became the words most valuable public company by innovating in design and products, by innovating at the business model level and by innovating at the corporate level. Plenty has been written about Apple’s products & design and the impact of disruptive models such as the App Store and iTunes. but very little has ever been said about Apple innovating at the corporate level under the helm of Steve Jobs.
So lets set the scene with some facts – Apple paid a minor dividend until 1995 at around 10-12c a share, then discontinued the plan. The dividend plan was only restarted in 2012 after Steve had stepped down as CEO, and was then run at $10-$12. Peculiar no?
So what happened? You could argue that the answer is hundreds of years old, so some history first. When chartered companies first started to appear in around 1600 they were formed with a specific monopoly or charter, given by a royal family or parliament. Then, each voyage would raise its own funding, and then on their return – the capital with a dividend was repaid, ending the relationship with the investors. That was assuming of course no pirates or sunk vessels or viscous natives got involved. In the 1600s, Risk Capital was really Risk Capital!
The British East India Company was so successful in its endeavors, it generated a demand for their shares to change hands mid voyage, as everyone with wealth wanted to cash in. The platform for this new trading to be occur, were the Trading Exchanges. Trading Exchanges had existed since the 1500s but traditionally dealt only in debt trading, both private and government. Without any competitors, they were the natural owner of the this new trading concept – Exchanging Stock in a company. Not to say it was easy though, the birth of share was difficult and it actually ended up getting banned until 1825, due to a complete absence of regulation to map out the rules and protect innocents against rogues.
Fast forward to around 1844 and legislation appeared in Britain around forming companies, so that anyone could have one and have it run their own agenda, without the Crown’s consent. When a company was formed, it was called “incorporation”. ie it was considered a body in its own right (corporal form). Early companies couldn’t own other companies because of course that would be considered slavery! Initial shareholders were simply the people that gave the company money its initial capital so that it could operate, and they did so hoping to get a return. Secondary shareholders were those that wanted to get in on the action after the company had launched and were of little interest to the company who had raised their cash. The company was the top of the food chain, not the suppliers of cash. This “Real Entity Theory” was preeminent from the dawn on the companies until mid 20th Century.
Fast forward to 1970 (when Steve Jobs was around 15) and a peculiar management theory started to take hold in the USA, that went along the lines of “the purpose of the company is to increase the wealth of the shareholders”. This position was obviously highly popular amongst the masses who were investing, as they were now perceived as being more important than the company. Executives also loved it because no one would complain how much they earned, if the shareholders were making a good return. Even if the dividend was sucking badly need resources out of the company. The meme spread like wildfire once it was backed by business schools, who benefited mighty by their graduates, now ivnestors, plunging money back into the schools.
Today the concept of investors first, is gospel. Even if it regularly doesn’t make sense. i.e. how can you have strategy to increase the wealth of shareholders (not some but all), when under modern trading conditions some can be on the shareholders register for a tenth of a second and others for a decade.? Why also should a company weaken itself, giving away hard won cash to people who usually aren’t the initial investors and therefore haven’t added value to the company?
The Steve Jobs Approach
So Steve Jobs rejected this investor first gospel and embraced the older company first idea. He repaid the cash of initial investors through dividends, and gave them a return. But once funds were returned, he ceased paying dividends as giving away cash made Apple weaker, not stronger. This strategy helped build the biggest publicly traded company in the world, with cash reserves larger than the UK treasury.
So if you want to innovate like Steve Jobs, question the basics of everything you do.