Companies exist to provide an economic return to their shareholders - More Money. In order to attain this raison d'etre of business existence, the requirements of all of the company's stakeholders must be addressed, because each of them seek - More Money.
Although allowance must be made in the company's vision for socially responsible actions, the rationale for these actions cannot be social betterment as the expenditure of company assets for purposes which will not ultimately increase shareholder value, would not only breach management's fiduciary responsibility, but will deprive the shareholders of More Money.
The business of business is to provide an economic return to its shareholders. Ultimately the measure of a business's success is increased shareholder value. However, as intermediary steps the concerns of all stakeholders must be addressed.
Employees expect and need:
Creditors and vendors expect and need:
Customers expect and need:
Shareholders expect and need:
Since the shareholders are the most senior of your stakeholders and the ultimate goal of the corporation's vision, and indeed its existence, is to increase shareholder value - More Money - it follows that any action which decreases ultimate shareholder value is to be avoided. This does not mean that all expense must be avoided as any expense will necessarily decrease current net worth nor does it mean that net worth and shareholder value are congruent concepts. Expenses incurred in the ordinary course of business in order to further the corporate vision are in the shareholders' best interests as they are made in furtherance of the company's plan to increase, as quickly as practicable shareholder value.
Providing a company's employees and other stakeholders More Money and meeting their other non-financial requirements and expectations, demands time and resources which might otherwise immediately fall to the bottom line as current profits. However, shareholder value, is not about current profits or current cash flow distributions dividends. Management must take a long term view of the necessity and benefit of meeting all stakeholder expectations. Counterintuitively, paying your employees more than market but less than costs attendant on industry average turnover, including the costs of searching, hiring, training, lost time, taxes etc., increases shareholder value.
Acknowledging, rewarding and providing incentives to employees for commitment, focus, quality, and productivity induces the occurrence and continuance of those desirable qualities which in turn increase company profits, and ensures the company's longevity, quality, reputation for the benefit of the employees and increases shareholder value.
In order for the company's creditors and vendors to meet its continuing and growing requirements for an uninterrupted, timely supply of quality goods and services, they need to be appreciated and acknowledged, paid promptly, and receive for reinvestment pricing. That means squeezing the nickel out of the company's suppliers until the buffalo screams, especially for non-commodity, specialty or uniquely available goods and services that does not add to shareholder value even though it may increase short term profits. The company's vendors need to make enough of a return on their operations in order to continue to invest in their own business new facilities, equipment, employee training in order to continue to reliably supply the company's growing needs. They are the company's strategic partners and they must be recognized and treated with respect and as a valuable resource available for use to increase shareholder value - More Money.
Customers continuously "vote with their feet." If they are not perceiving the receipt of an uninterrupted, timely supply of goods and services, at value pricing, they will vote with their feet by walking away and going elsewhere. Since a company's customers are the engine that starts and can stop the company's wheel from spinning, their requirements must be met and their expectations exceeded. While it is true that building quality into the company's products and services is costly, failure to do so is terminal. It is a necessary balancing act which management must perform every day. The company must deliver more quality than the customers expect, yet not more quality than the customers value. This tension is created as most often quality and cost go hand in hand. Since customers also demand value pricing, so they can make More Money, excess or unappreciated quality will not add to ultimate shareholder value, but rather detract from it because of the increased cost.
Shareholder value is defined as the net present value of all distributions expected over the course of the company's existence, plus the net present value of the company's liquidation or terminal value. Clearly time is an essential factor in determining shareholder value. The longer a shareholder must wait for a return on and of his capital the lower the per dollar value of that return and accordingly the greater the return must be in order to justify the investment. As a corollary to the time factor, it is axiomatic that funds, not profitably employed by the company should be returned to the shareholders as soon as they are determined to be excess. The return of funds may take the form of dividends or even liquidating distributions. The company does not exist for the benefit of management, but rather for the increase of shareholder value and when the company's vision can no longer be profitably pursued or when the pursuit of the company's vision no longer requires all of the company's resources those resources in the pursuit of its vision must be immediately distributed.
Of course if a company is publicly held you can easily determine a market value. It is the stock price times outstanding shares. However, market price even for a widely held public company is not a substitute for shareholder value because free markets are imperfect and information is not uniformly, universally, and evenly distributed to a knowledgeable universe of shareholders. In fact shareholder sentiment influenced by terrorism or presidential politics may have a greater influence on share value than a company's true worth.
One of the issues is of course is the difficulty in assessing probabilities of success and ultimate amounts recoverable. Is a small but virtually certain return more desirable or of higher value than highly speculative, but immensely profitable return i.e. municipal bonds versus an equity investment in a start up internet company? "Aye, there's the rub," to take a few words from Treasure Island's Long John Silver. For all the science of management discussed in this series of articles, all of the tools, models, budgets, forecasts and estimates, the achievement of a company's vision and the making of More Money still requires human intelligence, experience and application. These decisions and countless others like them, are integral to the company's Sound Strategies and must be based on Intelligent Information in order for Planned Performance to lead to Reasoned Results and ultimately More Money.
Ronald C. Lazof currently serves as a managing director of Prism Advisors, LLC, a management advisory and consulting organization. Prism focuses its attention on the entrepreneurial, emerging growth and mid-sized privately held corporate markets. Mr. Lazof served as President and Chief Executive Officer of Behr Process Corporation from 1996 to August 2001, playing a key role in the company's move from a private family held business to a publicly held multi-plant manufacturer and distributor of paints and coatings. Contact Ronald by e-mail: firstname.lastname@example.org and visit http://www.prismadvisors.com/ .
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