The quandary of shareholder value
Shareholder value. Ask 10 people what it is, and you are likely to get 10 answers. From the very practical to the more academic ones, but it is unlikely you will get 10 of the same answers. Which is why I used a blank sheet of paper to illustrate this article. Because it is like trying to arm wrestle with an octopus. You know what to do, but how to get there is less clear to map out. And it takes effort – a combined effort, a focused one. No one is an island, and no slogan is the answer. So, again I ask, what is shareholder value? And why is it so hard to answer that question?
Why? Probably because businesses gave up on shareholder and longer term value creation themselves a while ago. You can hardly flip through any business publication without hearing about some company or CEO being blamed for chasing profit, and short term results. Sanity vs vanity as the saying goes. Many times when a CEO falls, the blame is laid at the altar of value and pressure of the stock market, or the board pushing for growth so they can list their company.
However, in a quick yet insidious manner, this all flip-flopped. Until the 90s when shareholder options were introduced to the C-suite, most were looking at the medium to longer term: they understood the insanity of becoming obsessed (some might say) with short-term growth, the danger of putting off investment in key systems and staff in order to deliver short term numbers – because we’ve changed the system to reward people based on the short term. I’ve worked in many industries, mostly retail, and the Monday Trading Meeting is the bellwether in many companies. The only one. How are we doing this week? How about vs last week? How about year on year? What was the weather last year? What are our competitors doing? What is our monthly forecast target. Yet no one asks how this is working in the 3 year strategy. Or how it is delivering longer term value. Because in that room, people only live or die based on the results that happened just now. The future? They can hardly get the data ready to say how performance was for one week, as opposed to measuring it against a more useful grouping of KPIs – short, medium, and long term ones. Ones that ensure the short term isn’t the only thing that meeting focuses on.
And those things are important, crucially so, but they are dangerous. Because you can deliver value (yeah, we are up week on week!), but is it shareholder value? Shareholder value is something greater, that is more than increasing only the margin, or a slight share of market. Shareholder value is done through strategy, which takes time. Strategy involves getting under the skin of a business, and looking at it from all angles. From replacing legacy systems so companies have real time data to make prudent decisions, to deciding to expand their market, or to extend the range; those things are at the bottom of a Maslow’s Hierarchy of Needs of how to create shareholder value.
Shareholder value has been let down by management. They were playing a shell game of sorts, and hoping if they were moving things fast enough, everything would still keep spinning. They wanted to get everyone focused on the same thing, but it has backfired rather spectacularly. The distribution of options like sweets at a children’s birthday party meant that the options created the opposite behaviour; they had short vesting, or believing that short term results will inflate share prices, they allowed executives to cash in and left the idea of shareholder value in the bin. However, it was all new, and fun, all that money. Until it wasn’t, when the market crashed in a rather dramatic fashion in the 00s. Then people tried to legislate or to change institutional thinking, but it was like shutting the barn door once the cows had gone. Short-term focus was now firmly embedded in most companies.
If a company is owned by a private equity fund, it may have a reason for acceleration – they all have exit windows, plans for the companies in their portfolios, and the holding period has dramatically changed. Everyone is looking for a quick buck now.
In a well managed company, shareholder value should be right up there with customer experience and business strategy; they are absolutely interlinked. If you deliver great customer experiences by delivering a well developed company strategy, you will win customer loyalty, and continue to gain more, all of which leads to a virtuous circle of positive gains, and that flows to the shareholder. It also gives the companies even more options, so that shareholder value can be expanded; the window opens wider, instead of slamming shut so quickly. No one wants to sell a well run, well delivering going concern.
However, this means there is a generation at least that needs to ‘unlearn’ that short-term results are the holy grail, and if you get some long term growth, well, that is just gravy. Shareholder value must be aligned with the customer, with management, and with the movement of the market when defining strategies or looking for opportunities. At the moment, too many companies are racing to the bottom, creating a chasm in retail between the have’s – company’s that don’t need to discount, don’t need to shout, and don’t need to jump into the fray, vs the have nots – the emails every day with 20% off, no, wait 40% off, now it is free next delivery too, and double loyalty points….you get my point. Those companies have lost the concept of shareholder value, and are just trying to hit budget numbers that were magic-ed up in some odd fashion – a founder deciding he wants EBITDA to be X, so everyone goes back and reworks their budgets to meet that, as opposed to honest conversations about the business, its competitors, and where it wants to go, as well as where it is.
I’m not a seer, and I don’t have a magic ball, but I can tell you that Warren Buffet speaks about the above quite a bit, and I caught the end an interview with him the other day about shareholder value, and it rang true. (Hence the article) It isn’t black and white, it isn’t as simple as delivering against this year’s budget is good, and having no three year strategy is bad. The answer is different for every company. I do believe, however, we all need to remember shareholder value. By focusing on that, it changes the game, and I believe for the better.
Kristine is an Anglo-American with a good dash of Irish sass from her father tossed in who resides in digital land. I love retail, digital, talking about ideas, making things happen, wine, whiskey, sleep and the beach. Essentially, I’m a total digital/retail geek. I’m also sports mad. Wants to be in Cornwall as much as possible, and in her next career, an F1 driver just like Lewis Hamilton (or will happily retrain to be a F1 driver, or work for an F1 team) or Serena Williams.
