Delivering consistent superior shareholder returns is the toughest challenge a company can set for itself, demanding discipline, organisational change, cultural change and a sharp focus on competitive advantage.
Creation of shareholder value is the performance yardstick by which CEOs and boards are measured throughout the commercial world. Managing for Shareholder Value (MSV) is the term now used for a comprehensive management approach to delivering this performance. No other approach requires the same rigorous attention to a core guiding principle, nor offers the proven, significant long-term benefits in terms of performance, profitability, value creation, returns to shareholders and share price. Indeed, while recent market-wide share price volatility has led managers to question the impact they can have on the performance of their business, a recent survey carried out by PA Consulting Group among leading quoted corporations in 15 countries including Ireland shows that companies that fully embrace a Managing for Shareholder Value approach realise an additional 5% uplift in total shareholder return above their sector peers.
Given these results it is suprising that many companies are not implementing MSV strategies. Indeed, our survey reveals that 80% of companies are putting themselves at serious competitive disadvantage by not managing to achieve long-term shareholder value. A shareholder value-based management approach requires commitment on the part of a company to maximise shareholder returns. All strategic decisions are made with a view to adding value to the company, thereby creating shareholder wealth. Managing for Shareholder Value forces companies to concentrate on increasing cash flows to shareholders in the form of dividends and share price appreciation. It is these cash flows, rather than accounting earnings, which are the most important indicator of increasing shareholder value. The survey also showed that implementing actions that underpin a managing for shareholder value approach accounted for 45% of the variation between companies in the same sector - in other words almost half of their relative competitive advantage. However, the research indicated that while 86% of senior executives claim to believe the purpose of their business is to manage to increase shareholder value, only around 20% of companies are fully committed to such an approach. There is a clear opportunity for the remaining 80% to gain competitive advantage.
Whilst many CEOs understand the objectives of an MSV approach and are enthusistic about the benefits delivered they are unsure of where to start and on what to focus. The question for top management is how to ensure that it delivers value and avoids its shareholders taking action.
Top management must ensure that it is explicitly managing for shareholder value, driving for rapid alignment of strategy and performance management and then following through to ensure that the value is delivered year on year.
MSV is a top management issue. The first stage is to commit to MSV and to a Total Shareholder Return (TSR) target. The second stage is to align the strategy and performance management with this new target. Only with real focus on change management can the Board confidently expect that its initiatives will deliver the value required.
Value-based strategy programs are developed at two distinct levels of a business: the corporate level and the business unit level. PA's approach to resolving the questions of corporate strategy is based on building an understanding of the ability of each business in the portfolio to creat shareholder value in the future, and the ability of the corporation as parent, to add value to those businesses.
This approach quickly gives management clarity about how to find the value-maximizing strategy for the whole corporation. Among the questions to be asked are:
- Which businesses should we be investing in for growth?
- In which businesses should we be intervening to improve business performance?
- Which new businesses should we sell or exit?
- What should be the relationship between parent and subsiduary?
- How should we develop the parent itself?
Using this approach, PA clients have been able to increase the strategic potential of their businesses enormously: one Scandinavian business had strategic plans which would have delivered an 11% pa shareholder return over the lifetime of the plans. By working with PA, they uncovered an alternative strategy which could deliver 18% pa return - a dramatic increase in long-term value creation.
There are other specific areas which should be looked at in implementing a total MSV approach. Among these is strategic information management. If you ask most CEOs today whether they believe that they have timely and updated information revealing the current performance of their business and where it is heading, they will probably reply that they do not. Most CEOs today believe they do not have sufficient 'real time' knowledge of whether they are successfully achieving the strategies they have set out for their businesses and how markets may be changing. They also believe they do not have sufficient 'real time' knowledge of whether they are successfully achieving the strategies they have set out for their businesses and how the markets may be changing. They also believe they do not have sufficient knowledge about how their competitors are altering their own strategies to build competitive avantage in reaction to market and competitor changes.
This lack of fact-based strategic intelligence is an increasing probelm in today's competitive environment, where the impact of major decisions made in short time-frames can be the difference between business success and failure. PA's research has clearly demonstrated that by placing specific focus on obtaining and using this type of strategic information, senior management can develop important insights into the predictability of future earnings performance - something the market increasingly sees as a measure of economic heald and management competence.
Strategic information management represents a move away for conventional business thinking and practice. Instead of asking ' How do I use the available information?" executives should ask "What information do I really need and how do I get it and use it effectively and regularly?" To excel at value creation, companies must be able to answer questions such as:
- Where is value being created and destroyed in my organisation and why?
- What is the size and profitability of our markets? Are our markets growing or declining?
- How effectively are my strategies being executed? What is driving shareholder value in my business?
- How can I make higher-value strategic decisions?
- What are the relative strengths of our competitors?
- How are changes inside and outside my business likely to impact its value?
- What kind of executive 'dashboard' will help me know if I am likely to realise my strategic objectives?
- What kind of information should I share with stakeholders such as my directors, shareholders?
Strategic information will answer these and other important questions. However, our experience is that, for this to be truely successful, business leaders must also develop a process to manage the use of strategic information so that is is available when needed and serves as a reliable source of insight.
Another key area is marketing for shareholder value. This helps companies create more value for customers and shareholders by understanding where value is actually created and destroyed in their markets and portfolios. It also shows how to get the best returns on marketing investments and assets, in both the short and longer-term. Findings from PA's current research indicate that marketing typically delivers more value than anything else a CEO can focus on - prompting business leaders to focus on marketing as an investment rather than a cost.
Companies such as Cadbury Schweppes and Diageo have already demonstrated the signficant benefits of this disciplined yet creative approach, and the benefits if offers to customers and marketers, as well as shareholders. Implementing MSV is by no means an easy task. Past ways of doing business must be questionnned, and new methods adopted. Great effort is required but the rewards can be immense both in terms of returns to shareholders and market competitiveness.
