Link Transformation to Shareholder Value Creation
Shareholder value has long been the single measure of company value. However, as organizations are exposed to continuous uncertainty, they need to behave more like living systems to survive. The survival of living systems “is measured according to strict criteria of adaptability and fit with the sustainable environment.”[i] However, there are some challenges when managing shareholder value in a complex and unstable competitive environment:
- In a highly volatile economy, the accuracy of measures such as discounted cash flow and expected losses is diminished. It is difficult for highly adaptive companies to predict how much their core business might change in a few years.
- It is difficult to capture the value added from a company’s management style or decision-making capabilities. “During rapid transformation, change processes become more influential in determining financial performance than either structure or traditional processes.”[ii]
- Companies are beginning to see the impact on cash flow from connecting with other groups, such as their communities, partners, and the environment. Quantifying this value continues to be challenging.
In summary, the method of calculating economic value added must be “modified to integrate perpetual transformation rather than one-time (or periodic) shareholder value initiatives in managing a business portfolio.”[iii]
The next actions are designed to assist companies in determining shareholder value in a complex and volatile environment.
- Develop different cash flow scenarios. Organizations will be in a stronger position if they develop different cash flow scenarios for multiple futures based on the best estimates of what will change and how the market will behave in the next few years. The actual exercise of scenario building and the resulting discussion are more important than getting the estimates exactly right. The flow and exchange of ideas is valuable in generating the preparedness for the next phase.
- Link shareholder value at every phase. When new business lines or other opportunities emerge through the adaptive process, it is essential to link shareholder value at every phase and ensure “sufficient coherence among strategy, finance, organization, and implementation.”[iv]
- Focus on growth strategies. Such a focus is essential, even if it requires actions such as downsizing, restructuring, and reengineering, when an adaptive company is experiencing a major transformation.
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[i] Christopher Laszlo and Jean-François Laugel, Large-Scale Organizational Change (Boston: Butterworth Heinemann, 2000), 79. [ii] Ibid., 80-81. [iii] Ibid., 81. [iv] Ibid., 84.