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Create value, not profits

Sorry, folks, but as you’ll see in our Financial Directions section, a new survey from PricewaterhouseCoopers points the finger at companies for undertaking “short-term slash-and-burn cost-cutting” rather than approaching cost control strategically. Almost all companies said that significant short-term cost-cutting was “strongly detrimental” to staff morale, while more than half admitted such measures were more about impressing analysts than improving the business. This report pulls no punches when it says companies “confuse short-term shareholder appeasement with effective cost-control” (my emphasis).

This survey adds up to nothing less than a comprehensive failure, not of the analysts, but of the management teams that fail to properly communicate their companies’ value creation strategies. FDs have to take a leading role in managing and explaining the strategy and progression of their businesses, rather than massaging quarterly profit numbers. You should be creating value, not profits.

Two points: the first is, you may think we’re being na’ve and underestimating the power of City analysts and investors in this argument – though that’s an accusation rarely levied at PwC, which is not known for carelessly bandying about words like “appeasement”. In fact, we’ve met many FDs over the years who believe keeping the City happy doesn’t mean doing whatever is necessary to match the numbers they’ve dreamed up. These FDs argue that it’s more important to demonstrate clarity of strategic thought and give investors confidence that you know how to handle the inevitable setbacks.

The second point is that a robust attitude towards the City should not be used as an excuse for inaction or a fig leaf for failed strategy and inflexible tactics. Analysts may not know better than you how to run your business, but they do have greater detachment and, hence, a more impartial opinion.

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