By Peter J. Clark and Stephen Neill

The authors are partners of VBM Consulting (www.vbm-consulting.com) an international strategy and marketing management consulting firm focusing on corporate value improvement. They are also are co-authors of The Value Mandate: Maximizing Shareholder Value Across the Corporation, described as one of the leading book in its field. They can be contacted at: outperform@vbm-consulting.com.

The US accounting and management debacles of 2000-2002 were not caused by too much focus on boosting shareholder value. Instead, the cause was the exact opposite reason: too little emphasis on shareholder value improvement, correctly defined.

Way back in September 1999, when stock market prices in the US and UK were still hovering in the stratosphere, various business press writers derided executives as dinosaurs if they hesitated in the slightest in enthusiastically embracing the growing Dot-Com bubble.

CEO Bernie Ebbers of Worldcom was described by some of these same easily-steered pundits as the leading executive in the world´s telecom industry. Global Crossing, Qwest and others sharing the same code of business ethics swapped near-worthless ‘dark´, or unlit optical fibre capacity, boosting the paper value of those hollow assets with each successive round of contrived transactions.

Enron´s senior financial officer, Andrew Plaistow, was coronated by the once-influential CFO Magazine as their Man of the Year for his ‘financial engineering´. That´s Nineties-speak for extraordinarily complicated and opaque off-balance sheet financial manipulations, err, arrangements apparently understood only by persons of the calibre of Enron´s financial staff and Arthur Andersen, the auditors.

Now fast forward to September 2002. Market (and thus company) valuations plunged to all-time lows. The pivotal Nasdaq Composite index broke the 5,000 level on March 10, 2000. It languished below 1,500 at the beginning of September 2002. “Being Nasdaqued” became American slang for being bludgeoned.

Nearly everyone except VBM Consulting (refer to our other book of 2001, Net Value), Berkshire-Hathaway´s legendary leader, Warren Buffet, Professor Robert Schiller and the late Peter Martin of the Financial Times were bamboozled by the four year Internet value bubble nightmare.

The general business press were easily fooled by the bluff stories provided by highly-skilled company PR spin-doctors, who claimed that values were intact even as they were plunging throughout 2000 and 2001. Now we know the truth: the press were manipulated to help temporarily stabilize the markets while value-destroying CEOs such as Worldcom´s Bernie Ebbers were selling out.

Bearded Bernie soon became ex-chief executive of Worldcom, as just reward for a dozen disastrous decisions that occurred while the stock price just coincidentally plunged from over $60 per share down to a few pennies.

The ex-Canadian basketball coach´s tragic value errors included: gross overpayment for a half dozen ego-acquisitions made at the top of the market, pursuit of two conflicting and unaffordable business models instead of one that worked, and $6 billion of possible accounting fraud which occurred during his tenure.

Many of Ebbers´ imitators in the other telecommunications companies were also dismissed, for many of the same reasons except the creative accounting issue.

Down in Texas, CFO Magazine´s poster-boy Plaistow was revealed to have personally benefited from a financial shell game used to help obscure Enron´s true financial condition, apparently with enthusiastic co-operation of various co-conspirator investment banks. As soon as financial markets realized that Enron lacked a viable value-business model, Enron´s artificially inflated stock price plunged.

These are the facts. But don´t be surprised that a couple of the same business press cannon-fodder who missed the major developments of 1999-2001 also miss the cause of the value collapse, mislabelling it as excessive zeal in pursuing shareholder value.

Even those wastes of a good pen might have figured out the truth had Ebbers or others openly admitted to their massive value destruction. Unfortunately, they never make it that easy. You will never, ever see a company public relations announcement such as the following:

Chief executive of Loser Corp., Gerald Loser, is today distressed to announce that because of gross incompetence, extraordinarily poor decisions and the absence of any sort of viable value-business plan, he and his top team of senior executives have destroyed 95% of the value of the company. The CEO takes full responsibility for his failure, and expects to be penalized severely for his direct personal role in this massive, wanton destruction of shareholders´ wealth.

Instead, the company´s PR ferrets were far more likely to issue forgettable fog such as this:

The chief executive of Loser Corp., Gerald Loser, announces that the company´s share price and thus its market value has dropped, even though management is indeed following a value-maximizing strategy. In announcing lower-than-expected quarterly results, CEO Loser complained that shareholders do not recognize the great value of his company´s decisions.

Do not ever expect a thief to willingly admit to his crime, even a value thief.

Easily fooled by such simple PR spinner deceptions, the urchins of the business media found that their minds were even blanker than normal. Gosh, if the perpetrators of massive value destruction say it´s not their fault, then, golly, that must be true.

Somehow, some way, these microbrains collectively came to the laughable conclusion that the culprit must be capitalism overall-- and specifically the essence of capitalism, that is, focus on maximizing shareholder value.

Nothing new. Similar flawed explanation was offered in 1990-91 following the abrupt decline in company values after the collapse of the Leveraged Buy Out bubble of 1984-89. Ditto in 1970-71.

Truth is, the fatally flawed notion of ‘excessive focus on shareholder value´ tends to be dredged up at every cyclical downturn by a couple of business observers who don´t know any better.

A key point these future unemployables miss is that maximizing shareholder value is not some sporadic decision, but rather, the reason for the company´s very existence.

Fail to reward the providers of the company´s permanent capital (that is, shareholders) with superior returns in terms of Total Shareholder Return (share price appreciation plus cash dividends) and the company quickly ceases to exist.

AT&T´s fall from one of the world´s most respected corporations in the mid-1980s to a business bad joke by 2002 provides just one illustration of the fact that the problem with the value destruction is not excessive attention to shareholder value, but rather, the opposite.

AT&T sank from the top of its industry to laughing stock because of three successive management teams´ failure to resolve the fundamental business-value problem of a deteriorating Long Distance franchise. And by dabbling in unknown industries where Ma Bell didn´t know how to succeed.

Far from placing too much importance on shareholder value, the opposite was true.

Major miscues were committed, with devastating impact in value destruction terms. Mistakes that were completely avoidable, assuming a value-maximizing intent and the ability to achieve that goal.

AT&T CEO Armstrong´s decision in the late Nineties to ignore the caution signals about cable is now widely and correctly viewed as a fundamental value error.

Too much attention on shareholder value? No way. If shareholders´ interests had been cherished and their wealth protected, then maybe then Ma Bell´s esteemed leaders would have put their legendary arrogance aside long enough to examine fully whether they were destroying the company with a disastrous course of action (they were).

Isolated instance? Hardly. The root cause of value destruction lies in the failure of company management to pursue those few, precise value-maximizing strategies that might be made available to them, if only they know where to look.

Forget the US battle over accounting treatment of stock options. It´s over, despite the millions spent by Silicon Valley and others to continue the indefensible practice of failing to treat options as a period expense.

During the height of the Dot-Com bubble, lobbyists in favor of continuing Disneyesque accounting for stock options argued that any initiative to treat options as expenses could pop the Internet bubble.

Unless you´ve spend the last 27 months living under a rock, you know now that the Net bubble DID pop. But that didn´t stop the lobbyists, who now argue that treating share options as an period expenses could slow the pace of recovery.

Don´t look now, but the battle is over. The lobbyists for the spurious accounting of options LOST, hands down (Reference: Sender, Henry, "S&P to change its methodology for calculating operating profit," The Wall Street Journal, May 13, 2002).

Faced with pressure for more transparent accounting in the wake of disasters such as Enron, Global Crossing and Worldcom, S&P is going ahead and treating employee stock options as a period expense.

Even before Generally Accepted Accounting Practices (GAAP) officially change.

The S&P action is unprecedented. Individual analysts might have their own idiosyncratic adjustments for adjusting reported accounting statistics in terms of their subjective judgments about true financial conditions.

But S&P isn´t some junior analyst working for Dewey Cheatem Investment Bankers, Inc. Standard and Poors has the size, reputation and longevity to effectively be perceived by the financial community as ad hoc accounting authority.

By acting to change its options treatment EVEN BEFORE THE FORMAL ACCOUNTING AUTHORITIES ACT, S&P is saying, in effect:

Late 90s saw a surge of WW---D? themes in and churches and synagogues, sometimes becoming such a mantra that made it all the way to the ultimate media, automobile bumper stickers (one of our partner´s recently deceased father erected a WW—D? sign on the front of his aging Winnebago, paradoxically nicknamed the “Cathouse” since the vehicle also transports the family´s feline pets).

Then, Scott Adams made a splash and got a laugh in one of his Dilbert cartoons when he used “D”—standing for the diabolical sociopath-consultant Dogbert, for use in a mantra to be chanted at the client company: What, after all, WOULD Dogbert Do? (WWDD)

Yes, boys and girls, the time has come for another four consonant mantra. “What Would Shareholders Say?” or WWSS? Truth is, a company might apply any one of the half dozen of upper tier valuation formulas, or pursue elaborate (if not necessarily productive) faux-value data-crunching exercises. But unless WWSS is foremost in everyone´s mind at the company, "achieving maximum shareholder value" is nothing more than PR throwaway fluff.

Employees at a FMCG company in Southern California are struggling to regain lost value penalty imposed on shareholders for four consecutive years because of management miscues and persistent, bloated costs compared to the competition.

A small group of corporate heroes take forthright corrective action: a CEO-sanctioned group devises a significant, well-planned program to extend past facilities management value improvements to more operations, increasing corporate shareholder value by billions. But it´s no go, for a variety of suboptimal excuses. The losers? Company shareholders see even more dollar bills flying out their wallets as if on wings, even faster.

At a telecommunications company in Europe, internal rivalries between competing groups underly a tragedy in the true sense of that word. The telco´s investment in one of the rare Internet champion companies of netPhase II is dumped for virtually nothing, destroying massive corporate value.

At yet another firm, the chairman´s pipe dream of an ego-gratifying but untenable consumer product results in billions more in terms of lost corporate wealth (Does our executive incentive program SUBTRACT for value destroyed? Whew--- that´s a break).

The answer to such active value destruction? Process-types like to say that the answer is yet another grand flow chart, but value suboptimalizers side-step such machinations with ease. Out-of-work academicians retreat to “governance” and the ethical high ground of Board leadership, but such progress is glacial. Unless you have CalPERS or Hermes Lens on your Board, many review groups are still rubber stamps, and we all know it.

So what DOES work? Often, the simplest answer. What if, from the top down, everyone asks and thinks carefully about WHAT WOULD SHAREHOLDERS SAY? What would shareholders say in the case of that California firm where they were effectively handed the bill FOR BILLIONS in lost value because a couple of crony underperforming managers blew it? WHAT WOULD SHAREHOLDERS SAY at that telecommunications company where Euro notes fly out of shareholders´ collective wallets because a key stake in the Internet´s 2002-3 rebound is missed?

Value destruction becomes rampant value creation ONLY when everyone in the corporation knows WWSS and takes it to heart as a daily guide to action. The beginning quote in Chapter 8 of the new shareholder value best-seller, VBM Consulting´s THE VALUE MANDATE (by Clark & Neill, amazon.com, amazon.co.uk) originates from The Economist.

This is hardly a phenomenom limited to Armonk, NY. Such pragmatic discussions occur each day in LA, Dallas and Des Moines. Not to mention London and the midlands areas. When the competition takes full advantage of the best that the world labor market has to offer, failing to keep pace means destroying shareholder value, in relative terms.

Nor is such ´off-shoring´ just limited to IT. ANY white collar work that can be reduced to systematic analysis can and will be seriously considered for export in the coming quarters. Miss a golden opportunity to reform the corporation´s expensive cost structure, and that CEO may discover that he doesn´t even last the 3.5 years of the average executive.

The number and range of white collar staff work presently being done by middle (and sometimes upper) managers which can be restructured and exported at huge value benefit to the company is immense. The surface has barely been scratched.

Net-based research, field data analysis, projections, capital requests, forecasts. All these and other standardised analytical efforts can be exported, leaving the corporation to focus its recruitment on a very small handful of exemplar brand managers, strategists and sales stars who make the difference.

For those bemoaning the fate of the mediocre middle manager who is no longer sought by corporate recruiters and who will soon become unemployable, Up or Out has been a long-standing reality of the tough meritocracy that is called business.

The authors are partners of VBM Consulting (www.vbm-consulting.com), international firm focusing on corporate value improvement.

The Chief Financial Officer has traditionally served as the company´s shareholder value steward. He was the first to introduce the organization to core value principles. The one who pushed for the resources, methodologies and—most important—management time required to make ‘value´ work, arguing that effective company-wide program returns many times the investment. At heart, the CFO is the numbers person, after all.

As Managing for Value (MFV) has evolved, it has probably been the CFO who has kept pace with the transitions: shift in emphasis from valuation metrics of the early ‘80s to full-scale integrated value process modeling in the early ‘90s. A decade later, transition to systematic action methodologies and tools.

Today it´s MFMV—Managing for Maximum Value. The extra consonant helps differentiate the serious implementer of value best practice from those corporate underperformers which hope that merely chanting ‘value´ rhetoric is enough. It isn´t.

The value-aware CFO knows that step increases in sustainable corporate value are only achieved one action at a time. He knows this because the earliest value improvement initiatives occurred within his own financial function, years ago. 1

Now, management anticipate return to economic resurgence beginning sometime in 2003. The chief financial officer is probably the first to understand that a key to surging ahead in the next Boom is to re-double efforts at achieving company full value potential. 2 Through a balanced program, focusing on at the prime sources of (as yet) dormant value within the company.

How/where to proceed? We point to the following six part agenda, described below and summarized in the table opposite.

1.) First, Stop the Bleeding

Several of the company´s business units, projects, assets and team initiatives were projected as major value contributors in 1999. 3 Today, objective analysis reveals that the opposite is true. Each day that the bleeding continues lowers the company´s valuation a bit further.

This is a common sense starting point for the financial officer´s value agenda, for two reasons.

First, because of necessity. Until the deterioration is neutralized and reversed, nothing else matters. In today´s nanosecond change environment, once-robust leading companies slip effortlessly into laggard status or lower.

Once the bleeding starts, it can prove difficult to prevent from spreading and accelerating. De-staffed procurement departments at client companies provide notice that from now on they will only deal with the top two providers. For the provider-company, this means that sustaining the marginal, value-draining No. 3 (or lower) operation becomes the corporate equivalent of picking the pockets of the shareholders.

A lethal combination of forces confront management of the company who cannot or will not stop the value bleeding: downgrades by rating agencies, soaring debt servicing burden (in part caused by those downgrades). Not so benign neglect from valuation-shaping analysts. Understated whisper campaigns by marketplace rivals. Bankers suddenly re-scrutinize company credit lines, exactly when extra reserves are needed to prepare for value-based growth in 2003 and later.

In valuation terms, the pummeling intensifies if the financial community´s value-setters even begin to suspect that there are other bleeding wounds which are hidden or even worse, which management may not even be aware of yet.

Completeness, effectiveness and speed of the company´s initiatives to Stop the Bleeding emerge as key means for communicating to the financial community that the situation is under control. That the firm does command a potent value-building strategy.

Reason Two has to do with momentum. Many of the cessation options (‘Stop-Its´) comprising the Stop the Bleeding action list are far easier to effect than other methods for fundamental value reform, thus providing early momentum in the value improvement battle. Along with concrete evidence that the CFO-lead value resurgence works.

Company value is suppressed by delays in implementing long overdue improvements that everyone knows must be addressed sooner rather than later. There´s that pet business venture of the senior executive that plods along, stealing funds from higher value uses.

Some other initiatives started well enough, but mismanagement later transformed those businesses into staggering zombies. Careless expansion, starving the early stage business of its advertising lifeblood, inconsistent leadership—whatever the cause of the value destruction, it is the owners of the company who are asked to pay the bill.

Everyone already knows that the three dozen upper-level managers who stopped rising in the organization are now liabilities, value-wise. Will management do what the financial community already knows is necessary, or play ostrich for fear of offending golfing buddies?

The same names tend to arise in the lower one-third of the direct sales force, even after territories have been rotated, obliterating that excuse. Will that hidden source of bleeding be addressed? And what about the oversized strategy and HR departments that reduce value until stripped of superfluous activities, reports and costs?

It is never enough merely to undertake those ‘Stop-It´ actions that everyone knows about already and nothing more. In order to be valued as a company that manages for maximum shareholder worth, the CFO-led company resurgence must go much further: all the way to anticipating those potential value black holes that elude ready detection.

The start: reducing dependency on tomorrow´s non-creditworthy customers, even before payment data provides overt signals. Radical corrective surgery to those areas in the company that are value black holes in other organizations: promotions, new merchandising initiatives, new product development. Changes in staff, need for which is confirmed by the fact that few competitors want to poach the company´s leading people anymore.

2.) This Time, Value´s for Real

Once, the company might become perceived as ‘managing for value´ through self-declaration backed by slick financial PR alone. But that was before Enron, Tyco and the popped tech bubble. One thing´s for sure: in the coming expansion, no one will be treated as a value-maximizer without proof, first.

Throw away the TV make-up. Discontinue those lessons about how to deliver hollow ‘value´ bromides unconsciously and in the most convincing manner.

After years of operating at 30% below the performance-based value of competitors and fifty percent-plus below that company´s own potential, the last thing that the financial community wants is further value destructive waste in terms of outlays to a bunch of corporate Rasputins. 4

The PR bluff never worked, even though these spinners are unusually talented at preventing anything as mundane as facts from getting their way. Faced with a valuation 70% below its peak, one investor relations-type proclaimed with a straight face that without him, the plunge would have been even deeper.

The serious Value Champion CFO begins by throwing off the literally bankrupt practices of decades past, both metrics myopia of the 1980s and the grand but unimplementable ‘full company integrated processes´ that followed.

The path ahead is clear. Taking value serious means a full scope, covering all five of the sources of value within the corporation. Serious means the single best value solution for each of those fundamental reforms, rather than whatever pedestrian guess just came out of an advisors cranium. Finally, serious means risk management and execution equal to the CFO´s challenge of value leadership.

3. ) End of Looking for Value in all the Wrong Places

This might sound like a Mickey Gilley song, but it isn´t. The CFO´s corporate value improvement agenda is dead even before it has started when management isn´t even looking at the right targets of opportunity.

Wrong target? In the underperforming performance improvement program, there are as many excuses for the causes of the company´s ills as there are separate power centers.

Mostly, the value agenda is dominated by the present activities list, whether or not that´s where the opportunities for improvement reside. In the Scott Adams Dilbert comic, the consultant advises the manager to simply preface whatever he happens to be doing today with the phrase ‘We achieve maximum shareholder value by…´.

An exaggeration, but not by much. There´s the superfluous gaggle of administrators that claims to generate value because their own subjective analysis says (surprise) that their costs are slightly lower than comparable operations elsewhere. Then there´s the sales group that expropriates whatever definition for ´value maximizing´ is in fashion that season to ensure that the bottom 20% of the sales force always avoid the cut. Shareholders be damned. Next, members of the development group who have been so thoroughly brainwashed in the erroneous belief that value only comes from growth that they repeatedly pursue value-destroying initiatives.

You get the picture. There isn´t enough space here to list all the ways that these and other partial value actions diminish shareholder wealth. What does work is a value scope that covers all five of the potential sources of missing shareholder wealth.

Value-creating growth. Fundamental expense structure reform and new efficiencies. Value-optimal capital structure, financing and business portfolio strategy. Risk management. Guiding perceptions of the emerging new group of value-influencers who have emerged after The Bubble, when businesses were forced to forget the fluff and focus on what works in all aspects of business. Including management´s paramount responsibility, to maximize shareholder value on a continuing basis.

None of the five sources of value is enough all on its own. Overrely on one value source to the exclusion of the other four, and errors of partial value arise. But when all five prime value sources are examined effectively and pursued aggressively, the company has the beginning of a powerful corporate value improvement agenda.

4 ) Single Best Value Solution

"We create value." Problem with this standard shareholder value mantra is that it doesn´t address the related question, "How much?".

When the performance question is (incorrectly) phrased too broadly as, "Do you create value?", disappointment is assured. Almost any mediocre approach might be massaged to somehow be seen as creating at least some additional value.

At the company that manages for maximum value, that isn´t enough. The proven Value Champion is obsessed with discovering and implementing the single best value solution. That´s the solution generating the greatest incremental value, over the shortest period of time.

All other approaches are assessed relative to the optimal. A new, simple working definition for value destruction emerges: anything less the single best value solution. Take the recurring challenge of adjusting the company´s business unit portfolio to eliminate those parts that savage the company´s value.

First (and to no one´s surprise), company officials finally pull the plug on divisions/subsidiaries that have been drowning for years (´Stop the Bleeding´, above). The cycle is complete: the unit originally described as the savior of the corporation is downgraded to ‘revitalized´ and then to ‘restructured´ and then dumped or discontinued. Company value increases, but only by a modest amount. 5

To increase value improvement to Level 2, management expands their scope. They begin to address some of the embedded value underperformance in parts of the company that are not immediately apparent to outsiders.

There´s the marginally profitable fourth-in-segment struggling unit facing a dilemma between a fundamental change in its business model or sales of assets while they still have some value. Punch card equipment in the early ‘80s, personal computers today, 3G (third generation cellular phone) sets tomorrow?

At first, apologists contend that so long as cashflow is still positive, a case can be made for holding on and hoping for better days. There´s a freeze on further spending (something about ‘throwing good money after bad´) but the return ratios can be improved through reduction in the level of investment.

But postponing the inevitable in this manner merely deepens and extends the value damage from this source. A credible turnaround approach doesn´t exist, so the only way is down. Even with temporary positive cashflow, the operation/project/unit/team is still value-destructive based on the working definition.

Next, at Improvement Level 3 are the bold strokes that catch almost everyone by surprise, thereby enhancing the opportunity for enduring valuation improvement. These are the actions that prompt the comment a few months later that no one can understand why this wasn´t done years ago.

The actions involve both serious revenue enhancement and further efficiencies. Both risk management and improvements in the transparency of information available to the outside. In the case of the latter, goal is to foster the perception among value-setters that here is a company that is actually making itself easier to be understood, as the future direction is positive and there´s nothing to hide.

5 ) Zero Tolerance of Value Destruction

Talking the value talk is easy. Walking the value walk is far more difficult. Latter is achieved by very few, including scores of companies that spew value propaganda. How to separate the serious Value Champions from the rest? Outside evaluators look consider the completeness and rigor of the company´s actions to root out value destruction on a continuing basis.

Look again at that tonnage of charts, formulas and full paragraph technical definitions that characterize the ‘value´ programs in name only. Thos stale bromides and other material are literally boxed away, never to be applied to practical business issues.

One of the fastest ways to reveal the Company´s much-ballyhooed ‘value´ effort as a fraud is to tolerate or worse, encourage value destruction. The most damaging lapse of Zero Tolerance of Value Destruction occurs when the breakdown occurs within the executive office. 6

With grand fanfare, top management proclaimed that managing for value is ‘How we do business´. But daily behavior contradicts the carefully devised PR. Instead, actions by senior management communicate that the company is merely using ‘value´ as a cover for bad old business-as-usual.

Management´s impulsive, subjective guesses are merely repackaged by in-house lackies as ‘value-based analysis´ through spin and manipulated spreadsheet analyses that wilt under tough, objective examination. 7 Crony administrative departments destroy value because of embedded budget fat that persists each quarter, unreformed and untouched.

Eight layers persist in the organizational structure, even though the same company in fully lean mode could thrive with just four. Deadwood are kicked upstairs to expensive but ceremonial vice chairman positions, where they sometimes multiply their value destruction by involving themselves in still-prosperous parts of the business.

Money-draining projects and acquisitions continue to be supported, years after those initiatives stopped being value-creating. After all, we can´t have any of the top guys losing face, because they authorized these turkeys way back when. Promotions, R&D and business development initiatives are padded with value-deteriorating extras: extra expenses, non-productive people, money losing initiatives that bleed value but are not terminated.

Think that the company is being managed to achieve maximum appreciation of shareholders´ ongoing wealth? Think again. Every major action by senior management communicates the opposite to those in the financial community who shape future shareholder wealth.

Value-setters in the financial community fear either that (1) management selective applies ‘value´ only when it doesn´t impede freedom to continue to ‘wing-it´ or worse, (2) that top-most management lacks a clear understanding of the critical actions and characteristics that distinguish the Value Champion from the pretenders.

Antidote is simple and direct: Impose a regime of Zero Based Tolerance as complete and all embracing as exists in the private sector. No instance of value destruction is permitted, in any part of the business. The theory: failure to ruthlessly eliminate value destruction spreads the plague like wildfire.

Overt, visible instances of value destruction are straightforward. Shutting down or radically restructuring the losing subsidiary, division, unit, promotions/business development group or sales team is a fairly direct matter. If implementing management bluffs at meaningful cost and performance reform instead of doing the job right, then they are part of the problem rather than the solution.

Hidden sources of value destruction are more difficult to see, and thus more difficult to eradicate. At any one time, the top three layers of management tend to be distracted by a dozen-odd distractions, all of which claim to be mandatory but almost none of which have any direct impact on enduring shareholder value.

Cut them out, along with the wasted staff and budgets. In fast-changing times, inertia can quickly change the identity of the project/asset/employee from value-creating to value-diminishing. There is no in-between position.

Fail to keep up, and the company falls behind the competition and eventually succumbs. Yes, Welch´s Number-One-or-Number-Two rule still applies. Not surprisingly, the survivor-champion is also the company that exhibits zero tolerance for value destruction throughout the organization.

6.) Fixing the Value Incentives Structure

Substantial value improvement can never be achieved and sustained across the corporation without major changes in senior management behavior.

Initially, value rhetoric and the accompanying circus atmosphere generates its own momentum. With guidance, the company which has never instituted a robust Managing for Maximum Value program (or those who think they did, but got it wrong) might discover the half dozen relatively easy, early actions that can generate early value momentum.

The list includes capital structure changes; switch from a single investment funding authorization hurdle rate based on that company´s cost of capital to a multiple tier arrangement; and termination of chronic money-losing operations in the business portfolio.

The start of the value journey is the easy part. Sustaining upward value improvement momentum is far more difficult. Not only does the method have to be equal to the challenge, but incentives must also be linked to value creation. Balance of this part deals with the second issue.

Value-performance linkage has been attempted before, with inconsistent effectiveness. In the early Eighties, what passed at the time for a full value approach consisted of three elements: (1), recasting past company performance in terms of an adjustment for reported earnings; (2), to prescribe aspirational ‘stretch´ goals based on target performance improvements; and then (3), to manage against the variance.

The need to ‘recast´ earnings for performance evaluation purposes (1, above) confirms that reported earnings have almost nothing to do with changes in company ongoing share price. But changes in cashflow correlate almost exactly with changes in market capitalization, thus indicating the nature of the required adjustments.

Getting the stretch goals part right is far more challenging. Pressures may be exerted on the developers of the executive incentive program to devise a goal which appears to be far more difficult than it actually is. 8 Techniques to create such fog include (i.) careful selection of peer groups (to avoid any firms that might make the company look especially bad by comparison) and (ii.) creative use of means. Can´t perform at the top of your peer group? Never mind, this particular incentive program calls for full payout if company merely performs somewhere in the middle of the peer group pack. 9

Some of the most chronic pitfalls associated with incentives scheme have become particularly apparent in recent years with corporate ethical lapses. The company that confuses short-term share price gyrations with sustainable shareholder value improvement might be tempted to try price manipulation techniques to create an illusion of achievement.

The bag of tricks include withholding shares from the market (to exaggerate upward price movements), tout of the company´s prospects to attract enough gullible retail investors to boost share price and perhaps cause an upward price spiral ‘buyers´ panic´ (aided by press) and a relatively recent sham, the Initial Public Offering (IPO) issue that creates a manipulated sense of defying gravity.

But there are also other, less apparent pitfalls, from where the roots of an effective value-incentive structure must be built. An especially important aspect is the payout provision. When management thinks that there is no penalty at all for destroying shareholder value, but massive one year rewards for causing a perception that value has been created, temptation of a one year heist may become irresistible.

Notes:

1

Those activities within the financial function/department include (1) value creation by changing the company´s debt-equity capital mix (thereby changing the firm´s Weighed Average Cost of Capital, WACC), (2) using a WACC-based financial qualifier or ‘hurdle´ for making capital allocation and funding decisions, and (3) use of discounted cashflow and Cost of Capital analysis to make fundamental decisions concerning priorities in the business mix. Stated another way,(3) is the answer to the question, “Where does most of our value come from?”

2

Anticipating changes in business cycle direction is precarious at best, but one fact persists as a guide for planning. Ever since serious step were first taken by the Volcker Federal Reserve in the early ‘80s to begin to tame structural inflation in the US economy, the expansion/retreat pattern has evolved towards 8 years of market expansion, followed by 2-3 years of retrenchment and consolidation.

3

As referred to here, “value contribution” refers simply to an increase in the present value of future anticipated cashflows, net of all investment and costs, objectively and fully calculated. Two important caveats: (1) the primary analysis period (t) should be no greater than the underlying economic life of the related product bor service, typically not longer than 5-7 years, (2) terminal value (value ascribed to the initiative following the primary analysis period) cannot exceed 65% of the primary period value. Without both of these two limits, skilled numbers crunchers can easily devise an illusion that the value-destroying initiative instead creates value.

4

Beginning of Ch. 1 in The Value Mandate (“Your company is underperforming in value terms by 50 percent. In value terms, on a continuing basis.”) reflects the fact that the sources of value reform are both visible and available. Missing the correct value targets (No. 3, ‘Looking for Value in All the Wrong Places´, herein) comprises up to half of that gap. Incomplete and or inadequate solutions (No. 4, ‘Single Best Value Solution´) and execution comprise the balance.

5

The value improvement level is modest at this stage because the long-overdue corrective measures are already ‘in the market´, that is, anticipated by the financial community and reflected in valuation. The improvement that does occur largely reflects value-determiners´ relief that company management are starting to deal with money- and value-losing operations, activities and projects, rather than being in denial.

6

“Zero tolerance” is a phrase that is widely attributed to William J. Bratton, former chief of police of New York City and at this writing, the recently-appointed police chief of Los Angeles.

7

Refer to Note 3, above. The fact that few if any value spreadsheets are checked for accuracy years later says it all. In the ‘talk the talk´ MFV mirage company, overly-optimistic analysis is used to sustain management-by-budget, instead of management for maximum shareholder value improvement.

8

Net Value, pp. 18-19. The illustrated correlation between Market Value/Book Value and Discounted Cashflow / Book Value (Fig. 1A), is 94%. By contrast, the correlation between Price-to-Earnings ration and average Reported Earnings per Share (EPS) growth is a mere 2.4% (Fig. 1B).

It is reasonable to assume that the potential for conflict of interest increases significantly when the developer of the performance standard also has other commercial relationships with the company. There is rarely an overt warning to the advisor or consultant that the performance goal had better not be made too difficult, or other contracts could be jeopardized. There is no need for such a warning.

9

Wrong target? In the underperforming CVI program, there are as many suboptimal definitions for the causes (and therefore, explanations) for the company´s value ills as there are separate crony political power centers within the organization.

It´s like the Scott Adams Dilbert (c) comic in addressing whatever happens to be this season´s aspirational corporate goal. In this instance just precede whatever happens to be this week´s list of activities with a phrase such as, "We achieve maximum shareholder value by doing the following...." followed by that list of today´s make-work activities.

Of course, that´s an exaggeration of the problem of inadequate value improvement scope, but not by much. All of the examples that follow are actual, from VBM Consulting´s experience in recent years (no names).

There´s the unnecessary administrative division that claims to ´create value´ because its costs are slightly lower than comparable money-losing operations elsewhere.

Then there´s the sales group that contorts whatever definition for ´value maximizing´ happens to be in fashion that quarter in whatever manner is necessary to prevent the bottom 20% of the sales efforts from succumbing to a mercy killing.

Next, there are the members of the development group who have been so thoroughly brainwashed in the erroneous belief that value only comes from growth that they repeatedly pursue value-destroying initiatives.

Had enough? You get the picture. There isn´t enough memory space on the Net to chronicle all the ways that these and similar inadequate actions reduce shareholder value rather than increase it.

What DOES work in the real world is a value scope that covers all five of the potential sources of missing shareholder wealth.

Value-creating growth. Fundamental expense structure reform and new efficiencies. Value-optimal capital structure, financing and business portfolio strategy. Risk management. Guiding perceptions of the emerging new group of value-influencers who have emerged after The Bubble, when businesses were forced to forget the fluff and focus on what works in all aspects of business. Including management´s paramount responsibility, to maximize shareholder value on a continuing basis.

None of the five sources of value is enough on its own. Over-rely on one path to the exclusion of the other four, and the errors of partial value reoccur.

But addressed together, all five value sources comprise the beginning of a serious corporate value improvement agenda. 1

Note:

1

By Peter J. Clark and Stephen Neill

The authors are partners of VBM Consulting (www.vbm-consulting.com) an international strategy and marketing management consulting firm focusing on corporate value improvement. They are also are co-authors of The Value Mandate: Maximizing Shareholder Value Across the Corporation, described as one of the leading book in its field. They can be contacted at: outperform@vbm-consulting.com.

The US accounting and management debacles of 2000-2002 were not caused by too much focus on boosting shareholder value. Instead, the cause was the exact opposite reason: too little emphasis on shareholder value improvement, correctly defined.

Way back in September 1999, when stock market prices in the US and UK were still hovering in the stratosphere, various business press writers derided executives as dinosaurs if they hesitated in the slightest in enthusiastically embracing the growing Dot-Com bubble.

CEO Bernie Ebbers of Worldcom was described by some of these same easily-steered pundits as the leading executive in the world´s telecom industry. Global Crossing, Qwest and others sharing the same code of business ethics swapped near-worthless ‘dark´, or unlit optical fibre capacity, boosting the paper value of those hollow assets with each successive round of contrived transactions.

Enron´s senior financial officer, Andrew Plaistow, was coronated by the once-influential CFO Magazine as their Man of the Year for his ‘financial engineering´. That´s Nineties-speak for extraordinarily complicated and opaque off-balance sheet financial manipulations, err, arrangements apparently understood only by persons of the calibre of Enron´s financial staff and Arthur Andersen, the auditors.

Now fast forward to September 2002. Market (and thus company) valuations plunged to all-time lows. The pivotal Nasdaq Composite index broke the 5,000 level on March 10, 2000. It languished below 1,500 at the beginning of September 2002. “Being Nasdaqued” became American slang for being bludgeoned.

Nearly everyone except VBM Consulting (refer to our other book of 2001, Net Value), Berkshire-Hathaway´s legendary leader, Warren Buffet, Professor Robert Schiller and the late Peter Martin of the Financial Times were bamboozled by the four year Internet value bubble nightmare.

The general business press were easily fooled by the bluff stories provided by highly-skilled company PR spin-doctors, who claimed that values were intact even as they were plunging throughout 2000 and 2001. Now we know the truth: the press were manipulated to help temporarily stabilize the markets while value-destroying CEOs such as Worldcom´s Bernie Ebbers were selling out.

Bearded Bernie soon became ex-chief executive of Worldcom, as just reward for a dozen disastrous decisions that occurred while the stock price just coincidentally plunged from over $60 per share down to a few pennies.

The ex-Canadian basketball coach´s tragic value errors included: gross overpayment for a half dozen ego-acquisitions made at the top of the market, pursuit of two conflicting and unaffordable business models instead of one that worked, and $6 billion of possible accounting fraud which occurred during his tenure.

Many of Ebbers´ imitators in the other telecommunications companies were also dismissed, for many of the same reasons except the creative accounting issue.

Down in Texas, CFO Magazine´s poster-boy Plaistow was revealed to have personally benefited from a financial shell game used to help obscure Enron´s true financial condition, apparently with enthusiastic co-operation of various co-conspirator investment banks. As soon as financial markets realized that Enron lacked a viable value-business model, Enron´s artificially inflated stock price plunged.

These are the facts. But don´t be surprised that a couple of the same business press cannon-fodder who missed the major developments of 1999-2001 also miss the cause of the value collapse, mislabelling it as excessive zeal in pursuing shareholder value.

Even those wastes of a good pen might have figured out the truth had Ebbers or others openly admitted to their massive value destruction. Unfortunately, they never make it that easy. You will never, ever see a company public relations announcement such as the following:

Chief executive of Loser Corp., Gerald Loser, is today distressed to announce that because of gross incompetence, extraordinarily poor decisions and the absence of any sort of viable value-business plan, he and his top team of senior executives have destroyed 95% of the value of the company. The CEO takes full responsibility for his failure, and expects to be penalized severely for his direct personal role in this massive, wanton destruction of shareholders´ wealth.

Instead, the company´s PR ferrets were far more likely to issue forgettable fog such as this:

The chief executive of Loser Corp., Gerald Loser, announces that the company´s share price and thus its market value has dropped, even though management is indeed following a value-maximizing strategy. In announcing lower-than-expected quarterly results, CEO Loser complained that shareholders do not recognize the great value of his company´s decisions.

Do not ever expect a thief to willingly admit to his crime, even a value thief.

Easily fooled by such simple PR spinner deceptions, the urchins of the business media found that their minds were even blanker than normal. Gosh, if the perpetrators of massive value destruction say it´s not their fault, then, golly, that must be true.

Somehow, some way, these microbrains collectively came to the laughable conclusion that the culprit must be capitalism overall-- and specifically the essence of capitalism, that is, focus on maximizing shareholder value.

Nothing new. Similar flawed explanation was offered in 1990-91 following the abrupt decline in company values after the collapse of the Leveraged Buy Out bubble of 1984-89. Ditto in 1970-71.

Truth is, the fatally flawed notion of ‘excessive focus on shareholder value´ tends to be dredged up at every cyclical downturn by a couple of business observers who don´t know any better.

A key point these future unemployables miss is that maximizing shareholder value is not some sporadic decision, but rather, the reason for the company´s very existence.

Fail to reward the providers of the company´s permanent capital (that is, shareholders) with superior returns in terms of Total Shareholder Return (share price appreciation plus cash dividends) and the company quickly ceases to exist.

AT&T´s fall from one of the world´s most respected corporations in the mid-1980s to a business bad joke by 2002 provides just one illustration of the fact that the problem with the value destruction is not excessive attention to shareholder value, but rather, the opposite.

AT&T sank from the top of its industry to laughing stock because of three successive management teams´ failure to resolve the fundamental business-value problem of a deteriorating Long Distance franchise. And by dabbling in unknown industries where Ma Bell didn´t know how to succeed.

Far from placing too much importance on shareholder value, the opposite was true.

Major miscues were committed, with devastating impact in value destruction terms. Mistakes that were completely avoidable, assuming a value-maximizing intent and the ability to achieve that goal.

AT&T CEO Armstrong´s decision in the late Nineties to ignore the caution signals about cable is now widely and correctly viewed as a fundamental value error.

Too much attention on shareholder value? No way. If shareholders´ interests had been cherished and their wealth protected, then maybe then Ma Bell´s esteemed leaders would have put their legendary arrogance aside long enough to examine fully whether they were destroying the company with a disastrous course of action (they were).

Isolated instance? Hardly. The root cause of value destruction lies in the failure of company management to pursue those few, precise value-maximizing strategies that might be made available to them, if only they know where to look.