How Much Does a Value Focus Matter?

A survey of management attitudes and practices regarding shareholder value resulted in a practice-driven distinction between "value-aligned" and "non-aligned" companies. The survey collected top management responses to over one hundred questions plus follow-up interviews*. Value-aligned companies outperformed the other companies by an average annual excess return versus peers of 20% per year.

A separate U.K. survey found a nine percent per year difference in total shareholder returns between companies that are actively managing for shareholder value versus companies that agree with managing for value in principle, but have not taken any action.

Other research has found that successful adoption of a formal value-based management program affects managerial behaviors in improving both operating and capital efficiency.

The Power of Incentive Structures

The single most telling distinction in management practices of value-focused companies versus other companies was uncapped bonuses. An uncapped bonus opportunity is strongly associated with a bundle of leadership practices, performance measures, decision-making processes, and other incentive structures that Boards are confident will drive shareholder value. In a value focused environment, what sense would it make to limit performance, which is the clear effect of limiting bonuses?

Value-focused companies also share other incentive structures in common, such as a significant amount of variation in pay based on results, a select few measures driving the variation in pay, a careful balance between pay for group versus individual efforts, and transparent yet powerful mechanisms for insuring that bonuses are paid out for results that are sustainable.

Incentive structures go beyond variable cash compensation. Value-focused companies are very effective users of use non-cash compensation, such as options, and organizational incentives such as promotions and growth in responsibility.

What Gets Measured Gets Managed

"You hit what you aim for" is an adage well-supported by research. Managers are notoriously good at 'making their numbers,' whatever those numbers might be. People who focus on sales get sales, but not always profitable sales. So, it shouldn't be surprising that high-performing value-focused companies, in fact, follow value metrics in their reporting. These metrics not only provide a better focus, but a common language as well. They eliminate arguments about what is important.

Also, the standards against which your strategies and projects are assessed will dictate the kind of projects that are pursued and funded. Does your company fund projects based solely on value, or are other "strategic" considerations also weighed. A value-focus becomes most apparent in a company's investment decisions, where overcoming the cost of capital is either a key condition, or just another thing to keep in mind.

What Do Your Middle Managers Know?

Another key distinction between high and low performing companies is the economic literacy of their middle managers. Senior managers apparently know as much about their businesses in poor performing companies as in good ones. The depth of knowledge one level down, where strategy gets executed, makes a giant difference in how well a company performs.

 

 

Value focused firms also share financial and operational data more widely throughout their company. Seeing how the pins are falling makes sense to the people actually rolling the balls. A high degree of business literacy, wider access to operational and financial information, and an economic view of short- and long-term results powerfully reinforce each other.