Shareholder Value Maximization is about long term value creation, not short term results, and that means investing in Intellectual Capital.
Maximizing the value of our company is about helping others, not just ourselves. The net worth of a business owner increases right along with the value of his company. With greater wealth, we can best help those around us, in addition to ourselves. So, it’s not just about money. It’s also about maximizing our ability to help others.
Focusing on the long term is much like educating our children. What you’ve already done for your children is what needs to be done for your company. Children don’t provide any meaningful output for at least the first 18 years of their life, and commonly 22 to 26. All that time and money during this quarter century is spent preparing a child for the workforce and life. His or her lifetime earnings and life satisfaction are dependent on this period of investment in their future. We are investing in human capital via training and education.
There are metrics that are proxies for how our children are doing during their first 18 years: their grades, number of intimate friends (an indicator of social skills), and participation in social activities including sports. These metrics give us an idea of how the child is doing and what their prospects are for the future, long before we start to measure their income and net worth. We can think of those as key performance indicators for measuring Intellectual Capital (the value of a company above the value of its tangible assets) and its creation. The time we spend with our child coaching them – guiding them – in known in our business as “Knowledge Management”, or the process of constant learning and improvement known as Kaizen in Japan.
Real shareholder value maximization is about the creation of long-term value. We study this in our work on Intellectual Capital. Research and Development – as but one example – is expensed on the income statement and reduces reported income. In reality, it increases the value of the company over the long run because it increases the company’s new products, or cost reductions. The use of GAAP accounting does not accurately reflect the accretion of value due to the R&D activities. Public companies attempt to make disclosures, but analysts are still challenged on knowing how to use the data. The investment in acquiring and training people is expensed from an accounting standpoint, when I reality is and asset that yields great returns.
Since our firm works predominantly with private companies, you would think that the owners always look out into the future and try to build the most value over the long term. That is not always the case. There are occasions where we see an absence of investment in talent acquisition, talent retention, and succession planning. Nothing destroys the value of a privately held business like losing its key man. Owners must acquire and retain their successor.
A lack of investment in Human Capital shows itself with an absence of job descriptions, a lack of performance reviews, and an absence of any of linkage to key performance indicators. This is paramount to flying in the dark without instrumentation, and it can have potentially fatal consequences.
We also see a lack of investment in keeping up to date with the technology of the industry. Few things stay the same in this world, given the rate of technological change. There needs to be a process for staying abreast of industry and technological changes.
This is barely scratching the surface of the issues that go into the subject. The time and effort invested in working towards the goal of maximizing shareholder value provide their own rewards in both the capital raising process, and in the exit planning phase of the mergers and acquisitions process when the owner decides to transition out of the company. If, however, the owner transfers ownership and operations to the next generation, the effort put into maximizing shareholder value becomes more apparent. These would include constantly looking for ways to improve the company, periodically re-engineering the company, re-accessing the customers and market segments the company serves, and reviewing its supply chain.
The challenge for the privately held business owner is that they get comfortable with their performance and stop having new ideas integrated into his process that can take the company to the next level. That is where we can help. To learn more, contact us
