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Shareholder value creation
Five principles to guide the business
leader who is committed to success
I am often asked by
business leaders to help them with setting priorities for
themselves as they run their businesses. While it is
important for them to be engaged in smooth operation of the
enterprise, they also have to keep their eyes on other
things that I want leaders to do: providing strategic
vision, charting the growth path for the business, and executing
the business plan. These are three critical factors that
lead to shareholder value creation. Whether you run a public
or a privately-held company, the first goal that you have is to
create value for shareholders. If not, you have no
right to be there. You should either make way for someone
else to step on or the board should ask you to leave. This
is not easy to do because business leaders are so often distracted
by what appear to be important but in fact could be
value-destructing activities. As a CEO (or whatever your
title is, but I mean a business leader), you need to determine
what should be managed by you, what should be managed by others
but you should be kept in the loop, and finally what you shouldn't
be bothered with at all. Only then you will have enough time to
think about strategic priorities. You need to think what are
the activities that have the highest correlation with value
creation and only these should be on your TO-DO list.
(Related article: How
to avoid distractions in business?) While
a variety of frameworks and models have been developed and several
interesting recommendations made by experts, I still prefer what Ed Zander,
current CEO of Motorola, likes to do. The reason I prefer his
framework is that it is simple, easy to understand (not only by
the CEO, investment community, and senior leadership, but also by
the rank and file within the organization), and relatively easy to
focus on. In Zander's opinion, if an enterprise can focus on
these five elements of the value creation framework, everything else will simply
fall in place.
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Ed Zander's
Framework for Shareholder Value Creation
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- Thought
leadership
- Sets the
agenda
- Always invited
to the "dance"
- Incredible
brand
- Commands
premium valuations in the peer group
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Thought leadership It
is not only important to be good at what you do but also try to be
among the best in the marketplace. Value is created not by
being just another company that does something that nobody even
notices. Even a company like Wal-Mart, that essentially
sells cheap products imported mostly from China, provides a lot of
thought leadership in many areas: supply chain management, cost
efficiencies, use of new technology like RFID to change how
products are tracked as they move in the supply chain, etc.
Your business will be noticed if it provides thought leadership in
the marketplace and this has to come from the CEO. Sets
the agenda Are
you setting the agenda in the marketplace on how your company will
play or is someone else setting the rules and you are simply
reacting to the market forces? Take a look at companies like
Amazon or Ebay or General Electric or Ecolab. They all set
the agendas in the segments in which they participate. Are
you a leader or a follower? Followers don't create a whole
lot of shareholder value. Always
invited to the "dance" Again,
have you established a market position that commands
respect? Have you established your business in a way that
you are ahead of everyone else? If not, think what needs to
be done to move among the top three in your market. Incredible
brand Do
not think of your brand as merely the name that is recognized by
millions of people. Brand equity is essentially a
measurement of the strength of your company's relationship with
the customers. And it does not come just from advertising
aggressively; in fact, it is an aggregation of each and every
interaction that you have with your customers. (Related
link: Customer relationship management) |
Commands
premium valuations in the peer group The
market is not always right, but it is fairly close. If you
are a privately-held company, it may be hard to get this kind of
feedback in real time, but it is not a bad idea to keep track of
valuations on a regular basis (yearly for businesses valued at
less than $5 million and half-yearly for others). The
financial markets tend to prefer industry leaders who spend
judiciously on R&D, invest in growth opportunities, and
maintain their competitiveness. If you are not commanding
premium valuations, despite good performance, don't blame the
market. Find out what is wrong and try to work on it. Recommended
links: Growing high-value companies
When do acquisitions
make sense? Questions,
comments, feedback, and suggestions
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