But can MFV Best Practices also significantly improve financial performance of public sector organisations? This is the central issue which will be explored in this and subsequent valueOUTPERFORMER columns.

Private Sector and MFV

First, an overview of Managing For Value in the private sector, where MFV is most frequently (if not always most consistently) applied.

In companies led by managing directors possessing both inclination and ability to implement the few most important elements of Best Practice MFV, financial rewards can be considerable. Companies such as Coca-Cola, Cadbury-Schweppes, Unilever and General Electric have enjoyed share price value valuation premiums compared to their peers, at least during the years when their MFV programmes established a standard for others to follow.

But sustaining MFV leadership is far more difficult than mere one-time improvement. In The Value Mandate, we describe how today´s well-managed companies often perform far below their optimal level, value-wise.

Although Coca-Cola created massive value through its breakthrough advertising and the separation of bottling activities from marketing-oriented parts of the business, value was destroyed by management´s fanciful acquisition of Columbia Pictures (later sold to Sony) and five years of delay in launching Diet Coke, depriving Coke retailers of a competitive product in that segment.

The MFV Company´s share price premium generally reflects superior operating performance. Characteristics include all or most of the following compared to Non-MFV firms: higher profits, faster growth, lower continuing expenses and less investment.

To shareholders, this insistence on top value performance only makes sense (as well as cents). They, the ultimate owners of the business, have entrusted their capital to the managers of the business with the implicit understanding that management must create the highest possible return for them. No capital, no business.

Fail to consistent rank in the value performance top-quartile, and management might as well start preparing their CVs. Precedent demonstrates that one way or another, they will be looking for a job within a few quarters. The change will occur through acquisition or appointment. Either way, the owners of the business figure that they deserve someone willing and able to serve them best.

The Call For Top Financial Performance in the Public Sector

Is there a requirement for improved operating and financial performance in the public sector? In a word, yes.

You don´t need to be a fan of Private Eye´s “Rotten Boroughs” section to be acutely aware of some of the more alarming examples of value destruction in the public sector.

Hundreds of thousands, sometimes millions of pounds are squandered by public sector entities on trendy initiatives that later disappoint, bitterly. Political fiefdoms become transformed into lethargic bureaucracies which operating with arrogant disregard for top efficiency plus effectiveness.

Mind-numbing duplication of effort prevails, in part as there is little incentive to do things any differently. Some reports, meetings and processes are unnecessarily complex, squandering funds. Other processes have no purpose and could and should be terminated immediately.

So why should top management of a public sector entity seek to change this situation? After all, there are no ‘shareholders´ as such who own the company.

Or are there? Every entity of every type requires funding in order to survive and thrive. Cut off this lifeline, and everything screeches to a sudden halt: no services are rendered, no control exercised.

Public sector entities are accountable to their source of funding, which is ultimately their constituency. While not ‘owners´ in the same sense as the private sector, the parallels are undeniable.

To date, underperforming groups in the public sector have been insulated by a belief that those constituent capital-providers are unlikely to be able to exert much pressure. Numerous, diffuse and often uninterested in the day-to-day workings of public sector entities, underperformers figure that they´re safe to continue as they are.

But that was then, this is now.

A “numerous and diffuse” description used to also apply to private sector shareholders, who today, after multiple scandals and the Bubble of 1997-2001, are convinced that they can and must take a more active role. The recent turmoil over executive pay contains an underlying warning: create value first, before you seek funding for any purpose (including out-sized pay packages).

Don´t bet on the ‘owners´ of entities in the public sector remaining too far behind their counterparts in the private sector.
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