Disclosure: a short-cut to shareholder value

With much of the non-dot.com stock market currently in the doldrums, demonstrating that the board steers by shareholder value is becoming an increasingly important way of convincing investors that a company deserves an uprating. But this is a strenuous task, says Dominic Dodds of shareholder value consultant Marakon Associates, which has worked with companies such as Coca-Cola, BP, Lloyds TSB and Disney. He says that a shareholder value creation strategy has to be believed heart and soul by those at the top of an organisation if it is to have an impact on long-term performance.

Others do not believe that increasing the company share price need be so complicated. Research by MORI into the banking sector, which was carried out on behalf of the management consultancy arm of PricewaterhouseCoopers (PwC), seems to suggest that the key to a properly valued share price is clear communication, rather than a radical shift in management thinking – and some of the claimed benefits of greater disclosure are quite astonishing.

PwC’s Richard Barfield says: ‘Most banks, analysts and investors feel that more disclosure would increase share prices. Many investors do not view financial reports as useful for communicating true value and there are significant gaps between the information banks give and what the market wants.’

Just now, the banks tend to believe their shares are under valued; yet, at the same time, they see themselves as significantly better at disclosure than analysts and investors do. Are those two facts by any chance related?

The PwC findings are borne out by Dr Edgar Low of Deutsche Bank. Speaking before the announcement of the merger with Dresdner Bank, he said that the increased interest in shareholder value in continental Europe has been driven by two factors:

• strategic reorganisation prompted by growing competition for investors’ capital and the globalisation of business;

• and the evolution in external reporting, which gives greater transparency and fair reporting to shareholders.

Back in 1996, Deutsche Bank recognised that it had to abandon the traditional shibboleths of European companies such as the formation and writing back of hidden reserves and the use of financial reporting to hide weaknesses. In the 1996 annual report the board wrote: ‘Deutsche Bank can no longer be managed as it was. We opted for a divisional organisation that is both client and product driven, and vested those four divisions with operational responsibility.’

Dr Low also said that the move towards introducing shareholder value presupposes a change in a company’s overall behaviour. He said: ‘We have to have a commitment to total transparency and global comparability. There has to be an open communication policy, which includes the disclosure of corporate strategy, the monitoring and reporting of performance, and an intensification of investor relations activities.’

For companies that take shareholder value creation beyond improved communications, a deeper strategy is required. According to Dodd, the chief executives who have outperformed the market over 10 to 15 years are obsessed with shareholder value and have a number of characteristics in common:

• They abandon multiple objectives. The only question that CEOs such as Lloyds TSB’s Sir Brian Pitman ask is, ‘Does it maximise shareholder value?’ Having one objective implies the balanced scorecard approach. Such a stance eliminates debate about what the company is doing, but it doesn’t stop discussion on how to get there.

• They give up managing risk through diversity, instead risk is managed through focus. The company focuses on its strengths. So Lloyds TSB drew back from having flags all over the world and Coca Cola concentrated on the US soft drinks market (which could be seen as the classic definition of a mature market) and divested unrelated activities.

• They demand good growth, not bad growth. It is driven into the minds of those managing the business that they have to produce returns that are greater than the company’s cost of equity. As Dodd put it: ‘These CEOs are arseholes about short-term performance.’ In other words, they won’t accept ‘hockey stick’ growth, where profits have to suffer in the short-term in order to increase long-term profits. These CEOs see no inherent conflict between long and short-term.

• They manage cost through strategy not through brute force. Companies focused on shareholder value are probably no better at cost control than their competitors; however they make sure that cutting costs does not affect their customer service.

• They ensure they are offered a choice of alternative strategies. By insisting on alternatives people are made to think. Some companies – for instance Boots – are abandoning the traditional centre/business-unit control where budgets and plans are passed up and approved in favour of a continuous dialogue.

• They use shareholder value to motivate employees. They treat their employees as adults who can understand the concept and can work to achieve the aim.

• They fundamentally change the structure of the organisation, on average every 30 months. They also delegate accountability

• They define world class as the best in value creation. So they don’t just look to their immediate competitors. The organisation is not seen as a bank, service company or manufacturer, but as a wealth creation company.

Of course, all this makes it easy to see why, if disclosure is a panacea for under-valued shares, companies might just choose that route instead of a full commitment to managing by shareholder value.

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