Shareholder Value: The Long Way is the Short Cut
Every for-profit business exists for the sole purpose of providing shareholder value.
If a shareholder or owner is also responsible for business operations, then shareholder value can come from a variety of sources such as executive salary, stock options and bonus payouts. Otherwise, company shareholders receive value from revenue growth, capital investment gains, stock price increase and income paid in the form of dividends.
The path to short-term value is easy. Cut right to the profit line of your company and focus on squeezing our every dime of your cost and optimizing your gross revenue dollars. Consider no other factors. We see this business model on the cover of business magazines every couple of years. The cover of the periodical has full size image of some high-flying executive who suddenly figured out how to get their stock price to soar after 10 years of minimal growth.
How did they do this? Sometimes the company has a significant technological breakthrough, and it capitulates their success. Other times, an executive identifies a short-cut to higher profits. The latter is a recipe for short-term success and long-term failure. Typically, executives that take a short-cut find themselves the subjects of later news articles describing their demise. These execs are on the front pages representing a model of success one month and on the back pages later after their shortcut is exposed and their company unravels. The truth is, is that there is no shortcutting the shortcut.
The secret to building long-term value is understanding that the long way is the shortcut.
The shortcut enroute to long-term shareholder value must encompass these objectives in this priority order: 1) Protect Human Wellbeing, 2) Ensure Product Quality, 3) Provide Exceptional Service, 4) Relentlessly Improve, 5) Growth & Profit.
In order to make shareholder value your top objective, profits need to be fifth in the priority list of objectives. Let’s explore each objective in the correct priority order:
1. Protect Human Wellbeing
This objective falls under the umbrella of general corporate responsibility. It means keeping employees safe and healthy, protecting the environment from toxins, and ensuring product safety. When companies maintain these values and consider them nonnegotiable, they reap some benefits too. Protecting people helps to keep insurance costs down, it eliminates state and federal fines, it helps to avoid lawsuits and it builds favorable public opinion. Being favorably perceived by customers, supplier, employees, the government and the general public, improves a company’s revenue line. Hence, protecting human wellbeing protects long-term shareholder value.
2. Ensure Product Quality
Quality comes at a cost and because of this, quality standards vary by industry. Here’s an example of what I mean; the quality standards for heart medicine are much higher than the quality standards for heart-shaped candy. We also need to understand the difference between an imperfection and a defect. No product is 100% perfect thus, every product has some level of imperfection. In contrast, defective products fail specifications and should not be shipped to unknowing customers. When it comes to the quality/cost balance, the goal is to meet the customer’s value-proposition. To meet this objective, you must understand the quality level that your customers expect and then sell at a price-points that meet this expected level of quality. Optimizing the quality/price ratio will in turn optimize long-term share-holder value.
3. Provide Exceptional Service
Every buyer wants their product delivered to them on-time. How a company handles other customer experience aspects can be market specific. For example, if your company produces missiles used in the defense industry, you better have someone answering the phone 24/7. If your company produces playing cards, maybe customer service can be handled with less urgency. However, delivering products on-time to customers is non-negotiable in every market. Occasionally, late orders are tolerated. But just because a customer occasionally tolerates a late order does not mean they accept it. Every late order annoys a buyer. It just gives them one more thing to worry about. If you ship orders late too many times, your customer will soon be looking for a different supplier. So, when you consistently deliver products to your customers 95%+ on-time, you are ensuring long-term share-holder value.
4. Relentlessly Improve
When protecting company integrity is non-negotiable, then lowering costs, improving profits, and delivering long-term shareholder value can only occur by implementing improvements. These improvements come in a variety of forms including lean manufacturing, six-sigma, product design, cost reduction opportunities, capital investments, marketing strategies and technological advancements. Continuous improvement delivers long-term value.
5. Growth & Profitability
When your primary objective is long-term value, your integrity is immoveable and profits are delivered by relentless improvement. Your company’s revenue line and EBIT% are optimized when the leadership culture abides by these priorities at every level of decision making.
Protecting human wellbeing, ensuring product quality, providing exceptional service and continuous improvement are non-negotiable deliverables. When you draw a line in the sand when it comes to these things, then you can have it all!
When a leader shortcuts any of these things, then their business will eventually faulter. We see it all of the time. Leaders who take short-cuts for profit end up tarnishing their brand. This leads to lower revenue, reduced profit, and declining shareholder value. From shopfloor supervisors to CEO’s, business leaders who fail to manage to these objectives and in this priority order are incompetent and they can do serious damage to their business. Eventually, poor decision making will ruin the business.
If you are ever faced with a profit decision that even has the slightest chance of tarnishing your company’s reputation, your answer should always be, “No, we are not doing that. How do we improve and prevent a reoccurrence of this failure in the future?”
Always do the right thing. There is no shortcutting the shortcut. Protect the reputation of your company via integrity and relentless pursuit of improvement. Your shareholders trust you, be trustworthy!
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