Perspectives

Superior performance is the result of a superior approach to management, as demonstrated by those CEOs that have delivered superior shareholder returns over extended periods of time.

“All publicly traded companies seek to deliver superior shareholder returns, less than 2% of those companies are able to achieve that objective over any 5 year period of time. Those companies that do display five similar traits.”

Almost every chief executive is focused on delivering superior returns for their shareholders. Yet, few corporations have actually done so, let alone sustained that performance for any length of time. In fact over the last thirty years, only 2 percent of Fortune 500 companies have been able to deliver shareholder returns in the top quartile of their industry for five consecutive years. Why?

Most academics will cite the overwhelming force of competition that constantly works to level the playing field and revert the performance of any company to the mean. However, while competitive forces exist, this response ignores the performance of chief executives who have delivered returns far in excess of their peers over extended periods of time and, in some cases, for more than one company during their careers.

These CEOs will tell you that it is not competition that places the greatest limits on shareholder value growth, rather it is management misconceptions about what actually drives shareholder value and how to effectively manage its growth that is the most significant deterrent.

Managers in every corporation carry with them deeply held beliefs about how their company should be run. Some of these beliefs are rules of thumb accumulated over years of industry experience, while others have been absorbed from their mentors. Yet, few of these beliefs are the outcome of deliberate efforts to create as much wealth as possible for shareholders. As a result, many of these beliefs are standing in the way of doing so.

CEOs from companies that have delivered superior returns for their shareholders over long periods of time will emphasize that sustainable improvements in corporate performance begin by confronting management misconceptions and establishing the right set of beliefs. After all, it is these beliefs that influence the behaviors of hundreds, if not thousands, of managers across an organization and ultimately determines the results a corporation delivers over time.

The most successful CEOs not only think and act like owners, but they also cause managers across their companies to do the same. Not by demanding their employees slavishly execute their directives, but by establishing a set of guiding principles and organizational conditions that support superior decision making and execution.

Five Core Principles for Managing Shareholder Value:

1

Establishing the right definition of winning and measure of success.

The ultimate objective of any publically traded company is to deliver superior returns over time for their stockholders. While revenue, earnings and return on capital are important measures of performance, it is ultimately the growth in cash flow and economic profit that drives shareholder value. Read More
2

Capitalizing on the fact that shareholder value is always highly concentrated.

Economic profits and shareholder value contribution are always highly concentrated in every market and market segment. Over 100% of the shareholder value of most companies is being generated by less than 35% of the company’s employed capital, while over 25% of the employed capital is actually consuming shareholder value. This concentration offers tremendous leverage for improving performance. Read More
3

Managing to an explicit value-improvement agenda.

Only a handful of strategic decisions and actions will determine whether a company outperforms or underperforms its peers. Management must focus on the highest value-at-stake opportunities facing the company and not become overwhelmed by an endless list of tactical initiatives. Developing and managing to an explicit value improvement agenda maintains this focus. Read More
4

Deploying differentiated strategies and differentially allocating resources.

Superior shareholder returns are the result of economically differentiated strategies and the active reallocation of resources toward profitable market segments and away from unprofitable ones. Differentiated strategies and the differential allocation of resources enables companies to uniquely satisfy profitable customer needs more effectively than their competition. As a result, these companies capture a disproportionate share of market profits and establish a reinvestment advantage that is difficult for competitors to match. Read More
5

Building the organizational conditions and capabilities to manage shareholder value.

Shareholder value is influenced by the daily decisions and actions taken by hundreds of managers across the organization. The governance conditions, decision processes and incentive structures of an organization need to align manager and shareholder interests, empowering managers to think and act like entrepreneurial owners. Read More