The Value Habit: Play the Field or Play for Real | shareholder value

In our past four newsletters, we focused on implementing strategies that tailor your actions to your overall vision. We explored processes to create flexibility within a structured environment and to increase your company’s value for all stakeholders.

But aren’t strategies that create value for one group of stakeholders often at odds with those that create value for another? What if actions you take to increase the share price—such as cutting costs—conflict with what’s needed to maintain product quality and satisfy customers? What if it becomes cost-effective for you to outsource some highly skilled jobs to an offshore vendor?

This month’s issue explores how optimizing value at all levels of the company for all stakeholders—employees, customers, and shareholders—creates value for everyone.

Executives often take some stakeholders more seriously than others. How many times have you heard statements like the following?

“Long-term shareholder value is our top priority.”
“We exist to provide value to our customers.”
“Our people are our most valuable asset.”

But behind the scenes, the statements may have a less salubrious cast:

“We have to hit this quarter’s numbers, no matter what it takes, we may have to consider workforce reduction.”
“We’ve got to make sure we maximize the value of every customer. Consider eliminating incentive programs for loyal customers who are already locked into our product lines.”
“Margins are tight. Consider reducing or eliminating HR costs including head count and training programs. Make cost the number one criteria for selecting raw materials from suppliers.”

More often than not, when managers talk about value, they are referring exclusively to value for shareholders. But while most companies judge success by the price of their stock, this doesn’t mean other stakeholders don’t matter. On the contrary, unless you provide value to customers, suppliers, employees, and other stakeholders, you won’t—in the end—create value for shareholders either.

The Value Enterprise

In fact, it’s possible to argue that shareholders come last among stakeholders. To illustrate this consider the major components of the income statement:

Unless you satisfy the stakeholders at the top of the income statement—your customers—there will be no revenue.
The next income statement is cost of goods sold (COGS). Keeping COGS low, stable, and predictable requires a strong working relationship between you and your suppliers.
Salary expense is a payment to another group of stakeholders, your employees. It’s the cost of supporting customers, retaining talent, and building institutional knowledge.
Tax payments go to federal, state, and local governments that provide services and often incentives to hire and invest.
The income remaining after the above stakeholders have been paid goes to your suppliers of fixed capital: commercial bankers, bondholders, and other debt providers.
Finally, shareholders are the last stakeholders to see profits. This means everything higher up the chain has to work for the shareholder to see a return.

Outsourcing
The need to cut costs had led many companies to outsource after-sale customer support to countries where skilled labor costs are lower, even though this might mean eliminating some in-house jobs.

At first this practice may seem to contradict the idea of value creation for all stakeholders. What about employees? Aren’t they an important stakeholder here? The answer is, “Yes”—and the solution is to do what’s best for both the company and the employees.

It’s in every stakeholder’s interest to move lower-value jobs to a place where they cost less, assuming quality, reliability, and other metrics remain unchanged or improved. The challenge is to enable employees at home to trade up to higher value-added jobs. From an ownership point of view, companies need to look after their employees so they will stay on board, rather than jump ship at the next opportunity.

How you treat employees has far-reaching consequences, especially when you are competing in the marketplace for new talent. The U.S. Department of Education estimates that 60 percent of all new jobs in the 21st century will require skills possessed by only 20 percent of the current workforce.¹ In the United States, colleges will graduate only 198,000 students to fill the shoes of two million Baby Boomers in the science and engineering fields who are scheduled to retire between 1998 and 2008, according to NASA projections.²

The SAS Case
SAS, the world’s largest privately held software company, has revenues of $1.3 billion, 90 percent market penetration of the Fortune 500, and 26 years of consistent revenue growth. Not coincidentally, the company’s turnover is less than 5 percent in an industry where average churn exceeds 20 percent. The company’s philosophy is to invest in people for the long term and to give them experiences and training they need to grow. It is not unusual, for example, for employees to redeploy to new countries to grow the business globally. Underlying this approach is a strong belief that trust and respect are the best motivators of all.

Creating Stakeholder Value: Three Steps
So how do you achieve the goal of serving all stakeholders interests so that no single group is favored over another? Here’s how:

Communicate. Be sure all stakeholders understand your vision and how you plan to realize it. Creating value is a win-win proposition for all stakeholders.
Balance. Make “gives” and “gets” standard procedure in how you execute your plan. Show that compromise is not a form of submission, but rather a way to move beyond logjams of self-interest.
Demonstrate. Through your actions, show how benefiting one stakeholder generates positive results for all stakeholders.

End Notes:

IBID.

Related Content:

Enterprise Value Map™
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Straight Talk on Enterprise Value
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