As the CEO and, let’s say, owner of a private company, I would argue that you are in the asset management business – all be it with one asset. The question therefore that requires to be answered is, are you increasing shareholder value? CEOs of public companies get feedback on value achieved, every second of the trading day, if they choose to look.
Of course if you start a company from scratch and sell it for $50m in ten years time, then you can absolutely claim that you have increased shareholder value. However even in this simple example, that is a false statement, if some shareholders bought in at a valuation of $100m or more, during those ten years!
So let’s try other measures that demonstrate shareholder value is increasing:
- Sales are increasing every year at say 10% – nope, if margins are going through the floor and cash flow is dropping fast, it is quite likely shareholder value is being eroded.
- Profits are increasing by 10% every year – nope, if the business is dependent on that one legacy product, your cash cow might be generating more and more profit but so what. Dependency on that one old product, will lead to decline and shareholder value will be extinguished.
- Headcount is increasing, sales are rising, market share is increasing – nope, if the market segment you are dominating is in decline (VAR of laptops, motor vehicle parts manufacturing, mining supplies company, basic printing services, newspaper publishing) your shareholder value is most likely dropping.
- Sales and profits are rising at record levels – nope, if these rises are because one customer now accounts for 85% of the business, the business may be actually unsaleable because of the risk attached to losing that customer.
- The order book is at record levels and the sales teams are delighted – nope, because the new business is horrendously difficult to make and the margins are at suicidal rates.
- Your investment bank just closed a record number of deals and therefore bonuses are through the roof – nope, the two key rainmakers are leaving after their bonuses are paid and the biotech sector, that is your speciality, will be much quieter in the next 12 months.
I’m just asking you as the CEO, to consider your role as an asset manager. Yes you need to worry about acquiring and developing talent. Yes you need to worry about the cash at bank to make payroll. But your role of asset manager needs to be executed with insight, courage and know-how. Growing a business does not translate to increased shareholder value unless you’re working on the right stuff. When we’re appointed by clients to help scale their businesses, we execute a Discovery phase every time. We assess shareholder value based on 15 metrics. Armed with the output of our Discovery phase, we assess, if the business was sold tomorrow (or executed an IPO) what a strategic buyer would pay for the business, or if the business is not saleable today.
This allows the management team, with our help, to create a strategic plan that engages all levels of your company with a purpose, leading to significant, sustainable, creation of shareholder wealth.
For further reading on increasing shareholder value, search for posts on Scaling, using the box in the right-hand column on the website.