Sunday, January 15, 2006

Shareholder value and financial performance do not move together

Investment theory suggests that the greater the present value of a company’s future cash flows, the higher its stock market value should be and vice versa. The reality is that it is not difficult to find exceptions to this theory. Nevertheless, many decision-makers strive to maximize shareholder value by focusing obsessively on quarterly financial performance. Ironically, my research, published as Value Leadership (Jossey-Bass, 2003) suggests that superior shareholder value comes not from a focus on shareholder value but from harnessing a company’s daily activities to create competitively superior value for a company’s employees, customers, and communities.

Value Leadership differs from Maximizing Shareholder Value in important ways. First, Value Leadership focuses management attention on a company’s diverse constituents – particularly employees and customers -- rather than focusing exclusive attention on shareholders. Second, Value Leadership drives companies to understand the expectations of these constituents and to operate in a way that exceeds these expectations consistently over the long run. Maximizing Shareholder Value subsumes these longer-term considerations to beating Wall Street’s earnings and growth expectations through quarterly cost cutting and revenue maximizing behavior. Finally, Value Leadership balances the need to generate profit with a willingness to invest for future growth whereas Maximizing Shareholder Value sacrifices longer-term investments to squeeze out the most possible profit growth each quarter.

Value Leadership is important because it represents a fundamental shift in focus for managing a public company. Rather than obsess over beating quarterly earnings forecasts and raising guidance, Value Leadership focuses on ensuring that an organization’s daily actions create competitively superior value for its key constituents. The end-result of this shift in focus is superior shareholder value over the long-term.

The link between financial performance and shareholder value does not warrant so much management attention. For example, Martha Stewart Omnimedia saw its stock rise three-fold during the span of the trial and imprisonment of its namesake, Martha Stewart, even as the unprofitable company shrank at a 20% annual rate. By contrast, Wal-Mart, the world’s largest company with $305 B in sales, has consistently increased its earnings at 14% per year. However, its stock has been stagnant for the last six years -- stumbling 35% from its January 2000 high. Southwest Airlines is the best example of a company that focuses on creating superior value for its employees, customers, and communities. It creates a fun, team-oriented work environment for its service-sensitive employees – linking bonuses and equity grants to persistent lowering of operating costs while delighting customers. As a result of this and other key elements of its strategy, Southwest is the only airline with an uninterrupted stream of annual profits since 1973. Its stock has more than tripled in the last 10 years.

Companies should learn about the seven principles -- valuing human relationships, fostering teamwork, experimenting frugally, fulfilling your commitments, fighting complacency, winning through multiple means, and giving to your community -- and 24 activities which underlie Value Leadership. Companies can use the Value Quotient (VQ) to assess how well they perform these 24 activities compared to eight top-performing companies (through two recessions, these companies grew 35% faster, were 109% more profitable, and generated five times more shareholder wealth than their peers). These Value Leaders include Synopsys, WalMart, Goldman Sachs, MBNA, Johnson & Johnson, J. M. Smucker, Southwest Airlines, and Microsoft. A VQ-based assessment can help companies identify opportunities to improve the way they create value for key constituents – ultimately yielding superior long-term shareholder value.

3 Comments:

Blogger Scott A. Edwards said...

NOW, check this out for FREE...

There is a new, fully automated traffic-generation system that can send 1000's of targeted prospects to your website, for FREE! It only takes 5 minutes to set up to set your FREE account!

To find out more visit: new-wave site. It successfully exposes FREE information covering Traffic and new-wave related stuff.

12:06 AM  
Blogger Scott A. Edwards said...

New Blog Submission Software Takes Total Domination To A whole New Level, And Allows Complete Control Over Any Market and Any Product You Sell.--Renders All Other Marketing Methods Totally Useless by Comparison"
Click here: FREE DEMO

6:07 PM  
Blogger Scott A. Edwards said...

Hi my friends! I'm writing to you because I just came across a business that I think has great potential. It lets you save money on almost everything. Make money from almost everything, Including home loans- plus... help lower your taxes--best of all--it requires absolutely no investment. I thought you might be interested and like to check it out...

Here I have a sophisticated site/blog. It successfully covers sophisticated related stuff and almost everything else!

Come and check it out if you get time, Scott.

2:38 AM  

Post a Comment

<< Home