Opinion: why CEOs should focus more on shareholder value
If you run a privately held Small to Medium Enterprise (P-SME), you will know what a tough but rewarding experience it is. It affords you the opportunity to achieve two things in life:
- Change the world in your own special way – set and deliver on your own Purpose, and create a culture based around your held beliefs and values.
- Be financially well-rewarded, for you, your team, and your community.
At Scale, we work with many companies, and much of the work we do with them focussed on setting Core Purpose, Core Values, and ambitious goals for the business, then putting in place the plans to achieve them. To be clear, this work always leads to a more valuable business – a well-aligned and motivated team drives increased revenues and profits, and a strong management operating system adds significantly to the value of a business.
However, the primary focus of such initiatives is typically not explicitly focus on improving Shareholder Value. And to be clear, in the event of tension between Purpose and Shareholder Value, purpose should always prevail. We work with a business who help companies to improve their performance through diversity and inclusivity. They have a strong culture of bringing their best and latest ideas on diversity to market regardless of whether those ideas are current, popular, or mainstream. Belief should always trump profit considerations in such decisions (in fact, with time, the former usually drives the latter).
Why focusing on Shareholder Value matters
However, as the owner of a P-SME, focusing on growing Shareholder Value is important, because:
- It will allow you ultimately to sell the business, and leave a legacy that outlives you
- It allows you to realise value (i.e. make money) from your years of risk and investment
- When shared, it can do the same for your team (and get them motivated towards the same outcome)
- Many of the actions to improve Shareholder Value bring benefits that can be summed up in the phrase ‘allow you to sleep well at night’
So why don’t more entrepreneurs have a stronger focus on building Shareholder Value? Having worked with dozens of companies over the years, and our own experiences being unprepared to sell companies previously, we’ve identified the key reasons why entrepreneurs don’t build their companies with enough due consideration of Shareholder Value. Do any apply to you?
- The voice of Shareholder Value is a minority This may sound odd, but there is often just one, or a few shareholders, and though they are the most influential and powerful people in the company, their voice often gets drowned out by demands of the market, customers and staff.
- Lack of understanding of what drives Shareholder Value Most entrepreneurs only sell their business once in their lives, so by default aren’t good at it. They don’t have the knowledge and experience to understand what investors look at and value in a company.
- Lack of capacity to work on it Projects to drive Shareholder Value often fall into the ‘Important but not Urgent’ category. For entrepreneurs it is hard to get out of the gravity well of working in the business and not on it, and thereby apply leadership bandwidth to the problem of growing Shareholder Value.
- The actions to really grow Shareholder Value are hard It’s common to see companies where incentive schemes for key leaders are based solely on profit. Having a growing and profitable company is already difficult, but it’s far from the only key component of Shareholder Value. Take a look at the Shareholder Value Checklist. Many of the things on the list are really difficult to achieve (to the point where they may evoke a deep sigh and feeling of being ‘intractable’).
- Misplaced idealism Some entrepreneurs are uncomfortable with prioritising Shareholder Value, feeling it may be too selfish or materialistic, that leadership is about just focusing on Purpose and Vision. In fact, the opportunity and the challenge is to build a business that promotes both, a successful business can achieve both.
The Shareholder Value checklist
Obviously, it takes years to really grow Shareholder Value. Even if you have the notion to sell the company ‘in a few years’ time’, the process of preparation must start now. Often, by the time these issues become apparent, it’s already too late.
The specific actions to take will depend on the current strengths and weaknesses of your company. Our checklist, which highlights the key areas that investors value in businesses, and that often fall short in P-SME’s, will allow you to run an assessment of where you currently are for your own company. Bring together the management team and decide which one will you focus on fixing first - make it a priority for the Quarter.
If you repeat that each Quarter, and improve these scores, you will massively grow the value of your business.