The kings and knights of capitalism have lost their latest Holy Grail. The cult of 'shareholder value' (SV) has been shattered by slumps in share prices (which are supposed to enshrine that value) and by the accountancy and allied shenanigans that expose SV for what it really was and is - a screen for the naked pursuit of the unachievable (a steady, high rate of perpetual growth) by people whose behaviour was often unspeakable.
Even the more speakable value-chasers moved from good businesses into bad, grossly overpaid for acquisitions, grossly overpaid themselves, destroyed businesses by 'downsizing' and eventually decimated the very SV they were supposed to be creating. If that sounds like a fair description of GEC, now Marconi, so be it. SV, which sounds like a creditable attempt to put the owners' interests first, ends up by putting them last.
The underlying problem is the constant lust for that Holy Grail, a clearly identifiable, all-embracing measure that tells corporate bosses what to do and when it's been well done. At times this guiding light has been return on capital employed, at others growth in earnings per share. These have been found wanting, and for good reasons: anyway, the targets were nearly always missed. In booming stock markets, in contrast, SV soared as shareholders (by buying overvalued shares) obligingly created their own added value.
The bosses were not slow - better yet, lightning fast - to draw undeserved credit and excessive reward from the SV flood. The bad behaviour of the ABB ex-chairman, the renowned Percy Barnevik, makes the point in spades. He won his renown, not only for creating a starry transnational engineering giant, but also for demanding high standards of boardroom rectitude. Notoriously, he waived those standards when it came to his own ultimate reward: a monstrous £60 million (tax-free), secretly negotiated, hidden from fellow directors, and now slashed (under pressure) by 60%.
Like others in the greed mode, Barnevik could well argue that £60 million is a mere smidgen compared to the rich feast of value he created for shareholders. But the claim is tarnished by the poor performance of ABB since Barnevik passed over the reins to a handpicked (and also over-pensioned) CEO. Having doubled under Barnevik's lead, ABB is now a shrunken empire which lost $691 million in 2001, with value down 70% in two years. The wealth created in the 17 glory years (a 54-fold rise in market capitalization) has been succeeded by lean pickings for employees (many dismissed) and everybody else - except Barnevik and his top-level colleagues.
Maybe 'CEO value' should be substituted for shareholder value. By the CEO criterion, companies prospered mightily even during the profit recession that bridged the September 11th savagery. The recipe is simple. CEOs and their cohorts regularly receive (really from their own hands) higher and higher salaries, plus larger and larger stock options and other capital goodies. While stock markets have lately cut into this wealth, sometimes savagely, most beneficiaries need only wait for the tide to turn.
The tide will float them off, rather than any brilliance of strategies or tactics. Two forces come into play here. First, companies go through purple patches (like ABB) when strategy and tactics drive them forward under effective leadership. Wonders always cease, though. At some point, new strategies, radical tactics and changed leaders are required to regenerate a business whose old formula is failed or failing. Insiders, especially the highest, are in general painfully slow to spot the turning point and lamentably lax in reacting to the necessity for radical renewal.
Outsiders are little more acute or perceptive, which is the second force at work. Outside praise reinforces inside failure. In 1998 Price Waterhouse published a book which sought the lessons of success Straight from the CEO. Its six 'giants of value creation' included Sir Colin Marshall (BA), Eckhard Pfeiffer (Compaq) and Robert Shapiro (Monsanto) - all three of whom, today, might well be selected as titans of value lost, men who missed or messed up the moment of change with destructive results. PW's consultants, like analysts and journalists (and the managements themselves) were living in the past, when it's the future that feeds the true fortunes.
When downsizing's day was dying, many management gurus leapt into the pulpit to proclaim its defects. How could companies grow future value, they asked, by destroying it - shuttering plants, dismissing employees, slashing costs, dropping products and axing whole product lines? You can, by such methods, mightily raise return on capital and earnings per share, possibly with wondrous short-term effect on the shares. But what can management do for an encore? Many gains were once-for-all. Many slash-and-burn strategies, worse still, reduced rather than raised, prospects for the future.
The critical voices, however, were drowned out by the flood of unearned stock market riches. The most articulate growth proponent, Gary Hamel, even fell for the intellectual seductions of Enron. The difficulty is that the share price is the only thing that matters to shareholders (a hard but inescapable truth). That same price, however, should never matter to managers - not directly, that is. Other things being equal, the shares will indirectly reflect what super-investor Warren Buffett calls the 'intrinsic value' of the business.
The basis of this number is the difference between the net cash return from a company and the interest on long-term government bonds. If there's no difference (or still worse a negative one), Buffett won't buy. He asks simple financial questions - like what percentage is the company earning on the shareholders' equity? Chris Higson of the London Business School has demonstrated that, even on its heavily doctored and deeply dubious published figures, Enron would have failed elementary Buffett-style tests. But as the cult of SV raged, nobody bothered to apply them.
Long ago, when the future Lord Weinstock was richly rewarding GEC shareholders, he observed that profit wasn't a target, but a residual: the end-result of doing the right things in the right way. Chasing phoney financial targets is the wrong thing. And that invariably, inevitably, is wrongly done.
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