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

Feeding and Starving the Right Parts

Getting a business owner focused on value requires some basic logic that for some reason is incredibly difficult. It has to do with the fact that no-one likes being told their baby is ugly. Many business owners are too attached to certain parts of the business, making it hard to grow the company. Think of it like a garden which produces different vegetables. Some vegetables are more profitable than others. Those vegetables that sell the most fail to get fertilizer and attention because the gardener is so in love with his tomatoes, but tomatoes make no money. Farmers who are good business people change crops according to what will bring in the highest income. 

Getting out of the Quantitative World

The world is highly quantitative – it’s all about the metrics and meeting the numbers. Everyone is counting something – number of customer complaints, number of web visits, percentage increase in sales, and the list goes on and on. With so much emphasis on the quantitative side, the qualitative side gets lost and it is the qualitative stuff that is becoming more important. One reason qualitative information gets de-emphasized is that it is difficult to measure. If we can’t measure it, then it gets ignored. This is one of the fallacies with financial reporting; things like talent, leadership and brand recognition are no-where to be found on the financial statement. But these qualitative characteristics are the real drivers of performance and they warrant more attention in today’s quantitatively obsessed world.  

Putting Emphasis on Knowledge Assets

Knowledge workers are a critical source of value and in today’s world of intellectual assets, they represent your only competitive advantage. The fact that so many companies struggle to attract and retain top talent attests to a much deeper problem – your existing knowledge assets are poorly managed. There is enormous waste every day in every company. It stays hidden out-of-sight with too much emphasis on the day to day operational stuff. It has to do with not leveraging your knowledge and people like you should.

Hand Shakes vs. Lawyers

We live in a world where timely execution is critical. Obstacles and delays can be detrimental to many businesses in this fast paced changing world. What helps is when you can trust someone based on a handshake and get things done quickly before having to execute legal agreements. Yes, this may fly in the face of a more cautious and traditional view of business which advocates, get everything in writing and make sure you hire a lawyer. However, this traditional view of business is increasingly not grounded in the reality of how people need to get things done.  

The New Math for Pricing

It represents one of the most difficult decisions you will make: What price do I charge for my products? Many people, including myself, have always held that pricing should be based on covering all of your costs with some allowance for profits. However, thanks to Robert Dolan of Harvard Business School, there is a new math for calculating price that goes beyond the financial numbers.  

Focus on the Process - Part 1 of 2

All businesses require processes for the creation of products and services. A process is a collection of activities that consumes resources and adds value to the consumer (in the form of products / services) with some form of benefit paid to the producer. Additionally, all processes have variation – in business we call this risk. As H. Edward Deming, pioneer in the field of quality management, points out – If you can better understand variation in a process, you can plan for it and do things to prevent it.

Let's Define Best Practices

One of the most overused terms in business has to be: Best Practices. It seems everyone (including myself) is always labeling something as a “best practice.” Thanks to Hackett Benchmarking, a common definition has emerged for best practices. According to Hackett Benchmarking, a best practice must:

1) Place the company in a top percentile ranking within its industry.

2) Leverage and take advantage of technology.

3) Improve quality and speed, and also lower costs.

4) Give management more control and influence.

5) And finally, it has to be working; i.e. it can't be planned but not implemented.

Recognizing Intellectual Capital

The traditional accounting model with its financial statements is increasingly inadequate in helping us understand what drives value in our business. These value drivers are highly intangible and the accounting model is not setup to measure and report these critical assets. Part of the problem is simple – it’s hard to measure intangible drivers of value. They can include things like:

• Your ability to retain and have loyal customers
• The fact that your workforce is highly motivated and requires minimal supervision
• Having strong leadership that creates the right culture for performance
• Obtaining brand recognition that makes it harder for others to compete against your company
• Turning ideas into real product improvements for continued market leadership
• Leveraging your know-how against the assets of others in a shared economy

A Better Way to Grow

The consensus amongst most is that bigger is better. With increased pressure on our natural capital (soil, water, oceans, etc.) and an ever increasing gap between rich and poor, it’s time for all businesses to re-think what growth is really about. Take for example inequality - the United States has the fourth-highest income inequality among the world’s developed countries; only Chile, Mexico and Turkey rank higher with trailing countries represented by Russia, Ukraine and Lebanon.

In their book The Big Enough Company, authors Adelaide Lancaster and Amy Abrams make the argument that owners should be true to themselves and grow a company to a size where they can still enjoy running the company. You should not grow just for growth’s sake. A “big enough” company delivers benefits to a broad audience and continues to have a positive impact as the owners originally envisioned.   

Is Knowledge Really Power?

We all recognize (at least I hope most of us) that knowledge is instrumental to value-creation and that knowledge as an asset is far more important than traditional assets such as equipment, real estate or buildings. And to a great extent, every organization must become a knowledge organization and every employee must become a knowledge professional.