Increasing Shareholder Value

Increasing Shareholder Value

January 18th, 2012 // 11:15 am @

shareholder focusIncreasing shareholder value is at the very core of why a company exists; yet it is rarely even talked about in many boardrooms. And too rarely is a professional process followed to ensure that achieving an increase in value for shareholders is at the center of the business strategy.

It seems to be one of those things that board members think is obvious therefore understood by everyone. This is often not true; choosing how to increase value for your shareholders is a difficult yet important decision for the Board of any company.

There are a number of ways to maximize the value of the business, and choosing the right one is a critical Board responsibility.

There is a process to making these decisions and successful companies tend to have worked through this process or a similar one and have a very clear understanding of exactly how they will maximize shareholder value.

4 Step Process

1.    Decide on the strategical route to increase value.

This may seem obvious, to make more profit. While that is sometimes true it is not always the best way to make money for shareholders.

  • I ran a company called Hcareers, an online job board for the hospitality industry. It never made a significant profit, but I sold it for 28 times the capital invested after just five years.

Job boards at the time were valued by a simple multiple of their revenue, regardless of profitability.

Therefore the Board of Hcareers chose strategically to focus on revenue growth at the expense of profitability and was massively successful because of that decision.

  • I have also run a food canning business for H.J.Heinz in Hungary, where making the business profitable was the key to adding shareholder value. Again the board started by understanding that fundamental strategy and based all decisions from that base knowledge.

2.    Business Strategy

From the core understanding of the route to increase shareholder value, the board should agree the business strategy to achieve that goal. This is to decide what are the key strategies the company should focus on to achieve our goals.

  • To use the same examples, at Hcareers, the key business strategy was to be the biggest job board for the hospitality industry in North America. Customers want and will pay incrementally to advertize on whoever has the most job seekers. And job seekers will tend to surf the website with the most relevant jobs.

This decision flowed easily from the first strategic decision, and gave direction to the tactical thinking that followed.

  • With H.J.Heinz in Hungary, the route to profitability was to maximize the utilization of the expensive canning equipment and to reduce headcount costs. Again these decisions allowed for more focused tactical decisions to follow.

3.    Tactical Priorities

With these first two decisions made working out the correct tactical decisions is relatively easy, as there are clear strategic goals that the tactics must address

  • Hcareers tactically choose to build the largest sales operation of any job board working within the North American online job advertising market. And from that achieved revenue growth of 45% plus each year for five years, thus achieving its strategic goals, and allowing it to sell for 28 times the capital invested and giving shareholders a significant return.
  • At H.J.Heinz, we cut the staff levels by 30%, and simplified the product range to allow significantly improved utilization of the expensive machinery while reducing costs. This took the business from being a drain on Heinz profits to a contributor to them.

4.     Board Overview
Once the Board makes these strategical and tactical decisions, it gives operational management clear goals and clear tactics. From those goals and tactics focusing resources, budget building and decision-making are much simpler. Which allows a Board to effectively review and track success.

  • At every Board meeting within Hcareers and H.J.Heinz we had the opportunity to review success against an agreed set of strategic and tactical goals. This allowed the Board to be effective in it’s role and to be able to monitor business progress effectively.

Setting a clear direction at the Board level allows strategy and tactics to flow easily, thus focusing resources on achieving shareholder goals. When a Board fails to deliver a clear strategy to achieve an increase in shareholder value, it is extremely difficult for business managers to compensate for this lack of direction.

 


Category : Blog &Business Strategy

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"I had the honor of working with Mark for 3 years during my tenure at Hcareers. Mark is a truly dedicated and sophisticated executive, bringing the company from an early stage start-up to a leader in the industry in a short period of time, resulting in a very lucrative acquisition. Mark leads by example and his strength, knowledge, and dedication lead his team to growth and incredible success. I would not hesitate to join a company under Mark’s leadership, and would be grateful to have the opportunity to work with him again. September 15, 2009."

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