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Jun 30, 2000

Where has all the value gone?

Has shareholder value had its day?

Our mission is to create value for our shareowners over the long term. As you explore this section, you'll find facts, figures and financial information. But you will also learn about our past performance. And how we're working to continue to create value for our shareowners in the future.'

Coca-Cola's web site is pretty upfront about its shareholder value mission. Nor is this just some investor-friendly fizz designed to refresh and sweeten analyst reports. This is the real thing. Coke is one of the relatively few companies that has actually backed up its shareholder value rhetoric with documented action.

Many more have just paid lip service to the cause in the hope that a few casual mentions here, a value-creating graph or two there, will do the trick of persuading investors where the corporate priorities lie. Never mind that a little digging reveals a wholly different attitude throughout the company. It's all about presentation.

Whatever the spin, there is no doubt that the value-base management star has fallen, or at least gone a little crooked. Two or three years ago it was sweeping the globe, grabbing tired executives by the scruff of the neck and giving them a good slap about the face with talk of EVA, CFROI and other delightful acronyms. Stern Stewart, Holt Value Associates and other shareholder value consultants were rubbing their hands together with glee. Today, shareholder value has been overtaken by another investment fashion and, once more, executives are tripping over each other in their race to convince investors that they are ahead of the game.

'The hot topic is all e-business and m-commerce,' says Tsurumi Hamasu, a partner in strategy and value-based management at Arthur Andersen in London. 'People are constantly trying to generate new ideas. But that doesn't mean that shareholder value has gone away - it can't go away.' Hamasu points to the recent collapse of Boo.com as evidence of the fact that companies ignoring the basics of shareholder value creation - that is, producing a return on investment over and above the cost of capital - do so at their peril.

Still, Hamasu has obviously caught the new bug too. A couple of years ago, when she was at PricewaterhouseCoopers, she preached the need for companies to reduce the 'value gap', for solid communication of value-based management. Today, that has taken more of a back seat. 'It hasn't disappeared but I think that senior management teams have to focus on something and the new economy is almost make or break in the current situation. All shareholder value mindsets have now become very technology oriented. Our projects are now twelve weeks instead of six to nine months.'

To suggest that valuations are being determined by fashion would be churlish. Mind you, it doesn't half help, especially if you do it with a bit of panache and style. 'A lot of firms are looking at e-commerce as the next place to create shareholder value,' says Todd Leigh, European director at Holt Value Associates, neatly tying two investment trends together. 'That's not to say that there aren't some companies out there just benefiting from a fashionable story. There are. There are a lot of firms out there who are just putting a few buzz words about. We're trying to help [investment managers] weed out the companies that create value.'

What's the link?

Maybe the trouble is that companies have found that implementing a value-based management discipline does not necessarily lead to a higher share price. There was certainly a belief in the link a couple of years back but most have now thrown that well and truly out of the window. In the UK, two of the best known value converts - Lloyds TSB and Boots - have been underperforming compared to the market of late, and that has tended to hammer home the point that value-based management does not mean management of valuation.

Richard Bernstein has also done his bit. Merrill Lynch's chief quantitative strategist has been talking down the value of value-based management techniques from his New York office for a number of years. 'It's pretty straightforward and simple,' says Bernstein. 'Every study shows that the thing that ultimately moves share prices is earnings. Everything else is superfluous. These [value-based management] disciplines are only going to make a difference if they are helping to grow earnings.'

Shareholder value at a price

That's not to say that they cannot be helpful in focusing the minds of management, Bernstein adds, and they may be beneficial. Then again if you simply concentrate on growing earnings at a stable rate you are likely to be growing shareholder value over the longer-term too.

The thrust behind Bernstein's argument is that shareholder value need not be created by implementation of an expensive value-based management metric along the lines of EVA, CFROI or the like. Good old-fashioned business sense will do just fine, thank you very much indeed.

John Lewis, president of Valuation Technologies, a California-based forecasting, targeting and valuation consultancy, pursues this line of argument. 'I don't think that US companies are paying less attention to the creation of shareholder value, I just don't see a concentration on any particular methodology,' he says. Lewis believes US companies currently fall into three camps: those that feel they are contributing greatly to shareholder value and are happy to shout about it; those that are in trouble and have made it plain that they are starting to pay attention to the creation of shareholder value; and those in the middle who don't tend to mention it at all.

'I certainly don't hear as much chat about EVA, CFROI and the like as I did in years past,' comments Lewis, adding that a couple of years ago there were seminars and conferences being held left, right and center on the various metrics and what they all meant. 'That has really gone away. But that doesn't mean people aren't focusing on shareholder value anymore. There is still a quite proper concern about providing a proper return for shareholders.'

Lewis, like Bernstein, is acutely aware that managing for value does not automatically lead to a higher market valuation, particularly when there's a bit of a fascination with high-tech stocks flying around. 'Good companies don't always make for good investments,' he adds.

Understanding approach

Shareholder value metrics were originally sold to companies as a means of truly understanding and disciplining their underlying business. Away with these false accounting measures which distort reality, cried the value-based management consultants, with our help you can understand economic reality.

The fact that the Financial Accounting Standards Board (Fasb) in the US has made some significant moves to bring reported earnings more into line with underlying cash flows over the last couple of years has probably not helped the cause of those trying to sell value-based metrics to companies.

Patrick Finegan, managing director of New York-based Finegan & Company, believes that Fasb's moves on recognizing share options and on acquisition accounting have moved things in the right direction. But that certainly does not imply that shareholder value consultants are out of a job. Far from it. The US may be saturated with shareholder value consultants but they have new areas, such as compensation, on which to concentrate their services.

'In Europe and South America, the interest in shareholder value economics has only recently blossomed,' asserts Finegan. He points out that the US has always been very focused on shareholders as the prime focus group for companies, whereas in Europe there remains an ongoing debate over the need to focus on other stakeholders too. He contends that the shareholder value ethic seems to be winning the argument the world over. 'For example, there's been an overwhelming shift in the percentage of pay that is performance-based. The percentage of pay at risk - and what it's tied to - have changed dramatically.'

Lip service expertise

Managing companies in order to create value for shareholders rather than for the good of other stakeholders may go relatively unquestioned in the US but that certainly isn't the case in other markets. For example, many German companies have become experts at paying lip service to shareholder value creation while protecting the interests of their other stakeholders at all costs.

And that may not be the end of the world for shareholder value, either. One senior Zurich-based fund manager, who wishes to remain anonymous, believes the discussion has become too focused just on the creation of short-term shareholder value - to the detriment of the long-term health of businesses.

'The shareholder value thing has been blown a bit out of proportion,' he says. 'The key is that management is capable of producing a return on investment that exceeds the cost of capital. That's text-book knowledge and has been around for decades.'

This particular fund manager argues that a profitable return is a result of many things other than just getting the numbers right in the short term: selling good products, keeping employees and clients happy, being a good corporate citizen. 'Balance all these factors and you'll eventually get good profits.' He points out that you can technically increase shareholder value in the very short term pretty dramatically by, for example, taking on bad business. But that does not necessarily lead to longer-term value. 'There are lots of ways to boost the share price in the short term - mergers, spin-offs, acquisitions - some of which are useful, some are not. Some of these have had some very positive longer term effects but you can also see many failed merger attempts that haven't been thought through properly. They are often easier to do than the micro-management of the existing entity. That doesn't necessarily lead to shareholder value.'

Richard Carpenter

Covering investor communications, sustainability and employee engagement, Richard Carpenter has worked with the likes of Aviva, Facebook, Alibaba, HSBC and the London Stock Exchange. Before joining Bladonmore, he was CEO of MerchantCantos, part of...
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