Article

Manager's Journal: Say It Loud, Say It Proud - 'Shareholder Value!'

Restoring public trust in business is essential. But the far more pervasive problem is performance itself.

By Orit Gadiesh

First published on Αυγούστου 03, 2004
min read


When was the last time you heard someone use the phrase "creating shareholder value"? The expression nearly died of shame after WorldCom's Bernie Ebbers made quarterly stock analyst presentations by pointing to a nearly vertical share-price chart and challenging: "Any questions?" That's why Microsoft's bold action on behalf of shareholders last month—declaring it will pay out $75 billion in dividends over the next four years—was so refreshing. CEO Steve Ballmer left no doubt about who owns the cash or the future direction of shareholder value: "I'm confident we have some of the greatest dollar growth prospects of any company in the world." Restoring public trust in business is essential. But the far more pervasive problem is performance itself. In a study of publicly traded companies around the world, Bain & Co. found that, from 1992 to 2002, those failing to earn more than their cost of capital destroyed $1.7 trillion of value, as measured by their stock-market capitalization. By contrast, the major fraud cases over the last three years destroyed $200 billion of value. Fraud cases not only dominate the headlines; their fallout makes senior managers more circumspect and risk-averse. Because of scandals like WorldCom's, many CEOs shy away from bold pronouncements or actions. Instead, they're preoccupied with mounting concerns, some seemingly outside of running the business, that add up to huge distractions. The first is defending themselves against the charge that all senior executives are crooks; crooks, moreover, who justified their crimes by citing shareholder value as their gospel. Many CEOs understand they can't win this debate. So they remain silent. They deal, instead, with the hassles of Sarbanes-Oxley, Congress's attempt to legislate trust, and the Higgs rules in the U.K. The defensive climate recently prompted Fed Chairman Alan Greenspan to comment that "a pervasive sense of caution" is influencing business leaders. How many CEOs would recognize themselves in Mr. Greenspan's observation? Besides Mr. Ballmer, another notable exception is Caterpillar Inc.'s CEO Jim Owens. Mr. Owens, whose farming and construction equipment company hasn't missed a dividend since 1925, announced yet another increase in June, this one amounting to 11%. He called this part of Caterpillar's "ongoing commitment to improve shareholder value." A second, though related, CEO distraction is corporate image. CEOs are spending more and more time on the reputational front, promoting good deeds in social responsibility in an effort to be seen as "giving back." No one would argue against giving back. But Nestle's chief executive, Peter Brabeck-Letmathe, whose tenure at the helm has seen the company's total shareholder return grow in double digits each year for a decade, has tired of continually being on the defensive. He recently asked, "Is the implicit idea behind `giving back' that companies incur a debt to society simply for being successful? In my view, the first priority for any CEO is to ensure the creation of long-term shareholder value." Yet a third CEO preoccupation encompasses geopolitical risks, terrorism and the state of the global economy. For instance, U.S. companies increasingly worry about the "American-ness" of their brands overseas. In Saudi Arabia, where American products are threatened by boycotts, Procter & Gamble has long produced Tide detergent locally. Recently, they have changed their packaging: "Made in Saudi Arabia" now appears prominently on the label, and in Arabic. CEOs have to reclaim their agenda. Leadership, in the memorable phrase of the poet Rudyard Kipling, requires the ability to "trust yourself when all men doubt you." One example of CEO self-assurance revealed itself at Gillette. The company missed Wall Street forecasts for 14 quarters before Jim Kilts became CEO in 2001. Mr. Kilts refused to provide specific earnings guidance. Predictably, analysts responded by questioning Gillette's stability. But Mr. Kilts had gained his board's mandate to make long-term shareholder value his touchstone. Two years later, when free cash flow had doubled to $1.7 billion, analysts changed their tune. The Gillette story's moral is that CEOs must have the confidence to set long-term goals and the will to communicate those goals clearly. CEOs need to earn the public's trust the old-fashioned way—through performance. That's what Jim Kilts did. That's what Peter Brabeck-Letmathe has been doing. That's what Steve Ballmer essentially announced last month. And by recently promising "continued shareholder satisfaction," that's what Caterpillar's Jim Owens declared he plans to keep on doing. Ultimately, the trust that companies build through continuous, solid performance outshines every other consideration. Ms. Gadiesh is chairman of Bain & Company.

When was the last time you heard someone use the phrase "creating shareholder value"? The expression nearly died of shame after WorldCom's Bernie Ebbers made quarterly stock analyst presentations by pointing to a nearly vertical share-price chart and challenging: "Any questions?"

That's why Microsoft's bold action on behalf of shareholders last month—declaring it will pay out $75 billion in dividends over the next four years—was so refreshing. CEO Steve Ballmer left no doubt about who owns the cash or the future direction of shareholder value: "I'm confident we have some of the greatest dollar growth prospects of any company in the world."

Restoring public trust in business is essential. But the far more pervasive problem is performance itself. In a study of publicly traded companies around the world, Bain & Co. found that, from 1992 to 2002, those failing to earn more than their cost of capital destroyed $1.7 trillion of value, as measured by their stock-market capitalization. By contrast, the major fraud cases over the last three years destroyed $200 billion of value.

Fraud cases not only dominate the headlines; their fallout makes senior managers more circumspect and risk-averse. Because of scandals like WorldCom's, many CEOs shy away from bold pronouncements or actions. Instead, they're preoccupied with mounting concerns, some seemingly outside of running the business, that add up to huge distractions.

The first is defending themselves against the charge that all senior executives are crooks; crooks, moreover, who justified their crimes by citing shareholder value as their gospel. Many CEOs understand they can't win this debate. So they remain silent. They deal, instead, with the hassles of Sarbanes-Oxley, Congress's attempt to legislate trust, and the Higgs rules in the U.K.

The defensive climate recently prompted Fed Chairman Alan Greenspan to comment that "a pervasive sense of caution" is influencing business leaders. How many CEOs would recognize themselves in Mr. Greenspan's observation?

Besides Mr. Ballmer, another notable exception is Caterpillar Inc.'s CEO Jim Owens. Mr. Owens, whose farming and construction equipment company hasn't missed a dividend since 1925, announced yet another increase in June, this one amounting to 11%. He called this part of Caterpillar's "ongoing commitment to improve shareholder value."

A second, though related, CEO distraction is corporate image. CEOs are spending more and more time on the reputational front, promoting good deeds in social responsibility in an effort to be seen as "giving back."

No one would argue against giving back. But Nestle's chief executive, Peter Brabeck-Letmathe, whose tenure at the helm has seen the company's total shareholder return grow in double digits each year for a decade, has tired of continually being on the defensive. He recently asked, "Is the implicit idea behind `giving back' that companies incur a debt to society simply for being successful? In my view, the first priority for any CEO is to ensure the creation of long-term shareholder value."

Yet a third CEO preoccupation encompasses geopolitical risks, terrorism and the state of the global economy. For instance, U.S. companies increasingly worry about the "American-ness" of their brands overseas. In Saudi Arabia, where American products are threatened by boycotts, Procter & Gamble has long produced Tide detergent locally. Recently, they have changed their packaging: "Made in Saudi Arabia" now appears prominently on the label, and in Arabic.

CEOs have to reclaim their agenda. Leadership, in the memorable phrase of the poet Rudyard Kipling, requires the ability to "trust yourself when all men doubt you."

One example of CEO self-assurance revealed itself at Gillette. The company missed Wall Street forecasts for 14 quarters before Jim Kilts became CEO in 2001. Mr. Kilts refused to provide specific earnings guidance. Predictably, analysts responded by questioning Gillette's stability.

But Mr. Kilts had gained his board's mandate to make long-term shareholder value his touchstone. Two years later, when free cash flow had doubled to $1.7 billion, analysts changed their tune. The Gillette story's moral is that CEOs must have the confidence to set long-term goals and the will to communicate those goals clearly.

CEOs need to earn the public's trust the old-fashioned way—through performance. That's what Jim Kilts did. That's what Peter Brabeck-Letmathe has been doing. That's what Steve Ballmer essentially announced last month. And by recently promising "continued shareholder satisfaction," that's what Caterpillar's Jim Owens declared he plans to keep on doing. Ultimately, the trust that companies build through continuous, solid performance outshines every other consideration.

Ms. Gadiesh is chairman of Bain & Company.