Magazine Summer 2014

Is Your Company Addicted to Value Extraction?

Is your company focused on creating value — or on siphoning it off from others?

Paul Strebel and Salvatore Cantale Reading Time: 5 min 

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Swiss bank UBS

Swiss bank UBS, whose headquarters in Zurich is pictured here, agreed to pay an $885 million fine to settle claims that it had misrepresented mortgage-backed securities.

Cate Gillon/Getty Images News/Thinkstock

Amazon has recently found itself in the spotlight in the United Kingdom. The company has been accused of paying minimal corporate tax in the U.K. — by channeling sales through a Luxembourg subsidiary — as well as of treating workers poorly. In 2013, more than 150,000 people in the U.K. signed a petition asking Amazon to pay its “fair” share of taxes, and in 2014, more than 50,000 signed a petition calling for Amazon to pay its workers more.

One view is that this is normal. Taking some criticism while legally minimizing taxes and satisfying customers cheaply is part of Amazon’s low-cost business model. Another view is that taking advantage of workers and the U.K. business environment without making a corresponding tax contribution shifts costs onto society. Public awareness of this can be damaging to the Amazon brand.

Amazon’s situation is not unique — and it raises a larger question. Should companies exercise their ability to “extract” value from external or internal stakeholders? What is value extraction? Is it in the long-term interest of the shareholders?

We define value extraction as the capturing of value from other stakeholders, either outside or inside the corporation, by manipulating the competitive market process to the company’s advantage. Depending on developments in national regulatory and legal systems, value extraction may be illegal — or perfectly legal. To use a metaphor, if value creation increases the size of the pie and value capture enables companies to get a slice of that pie, value extraction involves obtaining a larger slice by manipulating the process for dividing up the pie.

Should companies exercise their ability to “extract” value from external or internal stakeholders?

Some companies avoid value extraction as a matter of corporate principle, but other companies integrate value extraction into their business model and assess the trade-off between its benefits and risks. However, this latter approach ignores the possibility that value extraction may either represent or conceal a longer-term flaw in the business model.

That’s not just because value extraction exposes a company to reputational or legal risks that are hard to assess in advance and may prove serious. More important, value extraction can undermine corporate values.

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About the Authors

Paul Strebel is a professor emeritus at IMD in Lausanne, Switzerland. Salvatore Cantale is a professor of finance at IMD.

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Comments (2)
Ira Gershkoff
If companies are relying on parasitic behavior to boost their profits at someone else's expense, then that certainly qualifies as unethical behavior.   But the core problem is not the companies; it's the legal system that lets them do it.  The solution is for the national legislatures to do their jobs and close down the gravy train, either by (a) closing the loopholes to make the behavior explicitly illegal, or (b) taxing away the profits.  To expect companies to "do the right thing" is a bit of a pipe dream, but they can be counted on to instantly cease unethical practices that will (a) put their executives in jail, or (b) adversely affect their bottom line.  That's the real solution.
Chris Reich
It is refreshing to see this piece. I have been beating the drum of the need for corporate ethics for years but to plugged ears. Businesses don't want to hear this. 

There is an alternative to squeezing out the last drop of blood from every member of the team. That is innovation. But Amazon's Fire Phone shows it prefers to milk the turnip rather than create new products.