You’re on a roll: You have a flexible strategic plan for achieving your company’s objectives. You’re choosing the projects that fit that plan. You have the right incentives in place. You have everyone moving in the same direction, talking the talk. You’re focusing on interests that unite your stakeholders. And it’s working. You’re hitting your numbers. But something is wrong: Your stock price isn’t responding. Maybe it’s even slipping. Investors are taking a wait-and-see attitude. What’s with these people? Are they blind? No. They’re human. They’re thinking of the future. What they want to know is: What’s next? What can we expect of your company down the road? And, you don’t have a good answer to that, do you? You’ve been so caught up in hitting the numbers that you’ve lost sight of the long-term view. Value-inhibiting behavior #6: You focus obsessively on short-term financial measures. Trouble is, simply hitting your numbers isn’t enough to build your share price. You also have to create a bright future for your company. A credible one. You have to give investors reason to believe in it. Why? Because to a large degree your market value depends on those great expectations. Specifically, can you continue to execute into the future and can you grow the business? What cash flows do you expect from investments your company will make in the future? That’s a tough standard. Many companies ride the growth wave of one good idea. Very few, perhaps one in ten at best, manage to generate sustained growth over time. Yet this is exactly what the capital markets demand. How much do future expectations affect share price? A lot. The higher the level of expected future earnings, the higher the stock price. On-target earnings in the most recent quarter are good news, but they’re history. And, history doesn’t matter. Or, more accurately, it matters only to the extent that it builds the case for your future. Market valuation of a company is inherently long-term and forward-looking. That’s why your share price may languish even if your earnings are on course. Often, what you can confidently say and support about the future of your company is more important that what you have done. Without a solid story to shape future expectations, shareholder value is in jeopardy, even if you do have a positive earnings report. In fact, as long as investors believe, even a negative earnings report may not hurt your share price if your future story remains credible. So if you’re serious about value, you need a strategy and message that are at least as much about what you expect and plan to do next as they are about what you did yesterday. You need to be able to show investors that you can sustain long-term growth. How do you build that message? You start with your concrete strategies and the value drivers that support them. How do those strategies help position you for the future? What steps are you taking to realize them? Value-creating behavior #6: Use your concrete strategies (and the value drivers that support them) to present a credible and convincing picture of where you’re headed. Make a detailed case to show that you’re actively managing for growth and change. Spell it all out, including the steps you’re taking to take advantage of external factors, such as regulation and the economy, as well as enhancing internal strengths, such as execution, retaining top talent, and governance. Don’t waste your time either rationalizing the past or generalizing about the future. Be specific. And, don’t skimp on the non-financial stuff, either. Non-financial factors can be a significant source of value. In Baruch Lev’s book Intangibles, he cites evidence showing that 85 percent of the market capitalization of companies is based on on non-financial assets. And according to a recent Deloitte Consulting LLP survey, two-thirds of fund managers consider non-financial disclosures important or very important to their decision-making.2 Then get the word out. Take your case to your board, executives, and other employees, as well as analysts. Give them a reason to believe in your future. Steps: Focus mostly on the future, not the past. Make aggressive plans to take advantage of change, not cope with it. Communicate the facts that support your vision, as well as the vision itself. Tell everyone your message, not only the analysts.
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1 Copyright Future World International June 2005.
2 Deloitte Consulting LLP’s Fund Manager Survey, June 2005.
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