Monday, November 28, 2016

From Shareholder Value to Stakeholder Value

The most significant sources of value for an organization are elusive, non-quantifiable and not easily discerned. They include things like talent, leadership and reputation. In order to get aligned around these elusive sources of value, companies should take a broader view of value – how do we add value to our stakeholders and not just the shareholders. The more traditional view of value has a narrow focus on the numbers and can include things like:

  • Short-term reactions to valuations which are sometimes dramatic such as mergers or layoffs
  • A bottom-line focus on earnings from quarter to quarter
  • Slow to respond to change where new ideas are not aggressively developed
  • A culture where value through intellectual capital is not widely practiced
  • Business success is highly centered around how we increase shareholder value
  • Sources of value are isolated or fragmented and not coherent across the entire company such as having the right culture

Let’s contrast this to a broader stakeholder view of value:

  • Sustainable, competitive thinking drives the vision and the company has much more long-term strategic focus
  • Value cuts across all parts of the company including the entire value chain
  • There is an easy flow of ideas and a culture of innovation
  • People who drive value for others (inside and/or outside the company) are promoted and advance within the company – it’s not just about meeting the numbers
  • There is an incremental approach to rational decision making that is rooted in predictive analytics
  • The bottom line is more about value and not earnings and this requires a broad and long-term view of the future

“A value is a belief in action. It is a choice about what is good or bad, important or unimportant. Values shape behavior. Until a value is acted upon it remains an aspiration. Values are hard to detect; yet they underpin organizations like the foundations of a house. If the foundation is weak, then the house falls down.”
- Unblocking Organizational Values by Dave Francis and Mike Woodcook

One way of moving away from shareholder value to stakeholder value is to identify real value drivers for your stakeholders. These bottom layer drivers will give you great insight into what really works on reaching the upper shareholder layer of value. This type of thinking needs to permeate all levels of the organization so that eventually, everyone is asking the question: How does my behavior or actions impact value and what can I do to create more value?

“What people value causes organizations to have cultures and acquire the reputations they have. World-class companies usually have cutting-edge technology, superior management systems, outstanding electronic systems, and database management, but their reputations all come back to human beings – the people who make decisions and take actions in these organizations, while using technological and management systems and tools. One of the critical characteristics of successful companies is a careful balance between the values, interests, goals, and objectives of the organization, and the values of the individuals who work for it.”
- Value Driven Management: How to Create and Maximize Value over Time for Organizational Success by Randolph A. Pohlman and Gareth S. Gardiner with Ellen M. Heffes

One common trap to value creation is to become overly pre-occupied with metrics. You should not confuse value creation with value-based metrics. Value type metrics are widely accepted and understood – things like EVA, Cash Value Added, Return on Investment, etc. However, the biggest sources of value (things like leadership, innovation, ethical behavior, knowledge, etc.) are not easy to quantify.

“Value is added in the sense that the situation is better than if nothing was done at all. But value is destroyed in the sense that the optimal value has not yet been implemented.”
- The Value Mandate by Peter J. Clark and Stephen Neill

Value-creation is a constant and difficult struggle since we can't predict the future and most important drivers of value are not measurable. Therefore, it may be appropriate to focus on only a few key drivers of value since organizational resources are limited. For example, one of the ultimate drivers of value resides in your people. So if you want to start at one single point on real value creation, begin with your human resource capital. One reason this is important is because people transcend and help you meet the value-proposition required by your other stakeholder groups – customers, suppliers, partners, etc. People represent the fluid dynamics that binds all stakeholders, covering the full range of value-creation in this age of stakeholder value and not just shareholder value.

“We don't believe in the word ‘measurement.' We don't supervise or manage people here; we lead. And we don't have employees; we have people. We don't have human resources; we have a people department. Our emotional contract with people is to treat them with respect, allow them to have input into the company, and allow them to self-actualize within their jobs.”
- Stephen Smith, CEO of WestJet

Thursday, November 17, 2016

Three Elements of Sustainable Growth

Long-term survival of any organization requires successful execution of strategies that secure or “lock-in” elements of sustainability. Unfortunately, not all organizations have made the distinction between sustainable strategies vs. short-term tactics that undermines sustainability. For example, the business model of Walmart is somewhat predicated on becoming the lowest cost provider of consumer products. In order to grow the business and make a profit, Walmart must continuously increase volumes. This approach to strategy is not sustainable since it chases a lower and lower profit margin while at the same time, Walmart must desperately try to make-up for the loss through higher volumes. A sustainable strategy tends to “lock-in” a company's future by doing things that don't exhaust the company, but set it apart from the competition. Hanging your strategy on easy to duplicate tactics such as lower costs usually doesn't work since the barriers to competitors are minimal.

Wednesday, November 2, 2016

Don't Go It Alone

More and more cities across the United States are recognizing how important it is to support new startups for growing the local economy. We now live in a great entrepreneurial age where people recognize they must control their own destiny and solve the world’s pressing problems. Unfortunately, many people seeking to start a business are not tapping into the wealth of resources available throughout the United States.

“Nearly four out of five small business owners admit that they have not taken full advantage of national and community resources dedicated to helping small businesses develop and grow.” – Survey Conducted by Fifth Third Bank