Wednesday, March 23, 2005

What shareholder democracy?

It is not just in Japan that shareholder power is not all it's cracked up to be. The owners of public companies the world over frequently find themselves powerless. In America, shareholders sometimes must contend with poison pills that stop them selling their shares to a bidder that the board dislikes, and even more often with rules that allow managers to decide which motions shareholders can vote on at their firm's annual meeting. In Europe, meanwhile, shareholders count themselves lucky if they even have a vote.

A new study prepared for the Association of British Insurers (ABI) by Deminor Rating, a Belgian governance consultancy, highlights the weakness of European shareholder democracy. Only two-thirds of the big European firms included in the FTSE Eurofirst 300 index operate a rule of one share, one vote. In the other third of firms, power tends to be concentrated in the hands of a minority of big shareholders who control a majority of the voting rights.

Practice varies widely across Europe. A mere 14% of the firms in the sample from the Netherlands allow their owners one vote per share; 25% of the Swedish firms; and 31% of the French companies. Things are far more democratic in Germany (97%) and Britain (88%). One-fifth of the companies issue shares with multiple voting rights, giving additional votes to selected shareholders. One in ten firms imposes a ceiling on the number of votes that can be exercised by any one shareholder, irrespective of how many shares he owns. Read on.

Wednesday, December 29, 2004

Bestselling Value Based Management Books

Monday, November 29, 2004

Dutch study confirms Anglo-Saxon model is best for economy

A study by the Dutch Bureau for Economic Policy Analysis ("CPB") indicates that Optimal Growth of the Dutch Economy (GDP) is best achieved with Global Cooperation and an Anglo-Saxon markets-led economic system. The study presents four scenarios with plausible developments for the Dutch economy at the macro and the sectoral level until 2040:
  1. Regional Communities: low market-orientation, no reforms in Europe: GDP +0,7%/yr
  2. Strong Europe: low market-orientation, reforms in Europe: GDP +1,6%/yr
  3. Transatlantic Market: Anglo-Saxon model, poor European integraton: GDP +1,9%/yr
  4. Global Economy: Anglo-Saxon model, European integraton: GDP +2,6%/yr

However, the scenarios with high GDP growth are also characterised by more income inequality and less concern for the environment. Furthermore, ageing has a negative effect on labour supply and employment growth and on the ratio of the active to the non-active population in all scenarios. An increase in participation, especially of women and older workers, may counterbalance these effects. See for more information (only partly in English)

Wednesday, November 24, 2004

Restoring investors confidence and Value Based Management

Arthur Levitt Jr. (former chairman of the U.S. SEC) states in the Wall Street Journal of November 23st, 2004 that "The single greatest impediment to the restoration of confidence in corporate America is continuing instances of extravagant non-performance-based compensation. These huge paydays bolster a system in which executives have incentives to manage the numbers for short-term gain and personal payout, and not manage their business for long-term growth and shareholder value". (...) "The boardroom culture is fraternal, rather than skeptical. Therein lies the crux of the problem".

Levitt's statement reminds me of something President Bush said 2 years ago: "At this moment, America's highest economic need is higher ethical standards - standards enforced by strict laws and upheld by responsible business leaders" (Corporate Responsibility speech, July 9th, 2002).

I agree with Levitt that the crux is rather that some CEO's in the past have been allowed to get away with managing for short-term incentives (by over-cozy boards and over-greedy shareholders) than an ethical problem per sé.

Some business ethics education surely doesn't hurt for those who need it, but indeed the core of the strategy for corporate America to restore investors confidence must be implementing Value Based Management: managing corporations for long-term shareholder value. Boardroom culture, executive compensation, corporate laws and accounting methodologies should all be in concert with this paradigm.

Monday, September 13, 2004

Stock markets and long-term shareholder value

Sometimes I get a little tired and discouraged of reminding people "it was price, not value, that caused the stock market boom and bust of the late 1990s and early 2000" as Paul Lee, a financial Journalist and Shareholder Engagement Manager at Hermes Investment Management in London, puts it in an excellent article in the Book "Questions of Value".

"Everyone knows the market gets things wrong. Few have the temerity still to cling to the perfect-market hypothethis. Those of us who have experienced stock-market sentiment from the inside know that often there is no explanation other than psychology for apparent failures to recognize value - until some external event changes the mood and makes it impossible to ignore - or for overvaluations going unquestioned untill the destruction of value becomes so great it can't be ignored".

I agree with Mr Lee. Also to his view that it should not be a radical view that shareholder value is something longer-term than the market's short-term price fluctuations. Indeed the bulk of investment is long-term in any case, understanding pension funds, life insurers, asset funds, and other professional investors in many countries hold over 50-60% of all equities. Everybody knows these parties take a long term view towards value creation, 10-20 years or even more is not execeptional. Add to the 50-60% an extra 10-20% long-term retail investors and the conclusion is that typically a healthy three quarters of all investors are interested in long-term value creation!

Ending the above misunderstanding once and for all is important, because it is one of the factors that cause stock markets crises. Lee actually mentions 4 reasons why share prices do NOT always reflect the intrinsic value of a company:
  1. As well as long-term investors, although not holding the majority of shares, there obviously are also many shorter-term investors
  2. Sometimes the agents that work for the long-term investors may not work to the long-term timescales that would benefit their clients (in particular many fund managers have short term performance targets)
  3. Not all long-term investors are equally long-term in their outlooks
  4. Most funds have strict rules about the type of companies in which they can invest. This can also cause strange price effects in circumstances

Not withstanding these factors, once and for all: the majority of investors in stock markets are in for the long run!

Friday, September 03, 2004

Cranfield survey results support Performance Management

A new comprehensive Business Performance Management survey by Cranfield University and Hyperion at (the CFO's of) the 5,000 largest organisations in the United States resulted in two key findings:
1. Organizations with a formal BPM approach believe they out-perform organizations without a formal BPM appoach
2. Most organizations using packaged or custom BPM aplications to automate their BPM initiatives report better performance in the activities of the performance planning value management chain than those using ERP appliactions or spreadsheets.

At a more granular level, Cranfield Research Fellow Bernard Marr reports:

  1. Build a Business Model - Companies with a formal BPM approach report that they more often use causal models to build a hypothesis and link objectives and performance measures to the firm strategy.
  2. Collect Data - Companies with a formal BPM approach report higher data quality and increased consistency in how they measure performance.
  3. Analyse and Interpret Data - Companies with a formal BPM approach report improved interpretation of their performance information.
  4. Extracting Insights - Companies with a formal BPM approach claim to extract higher quality insights from their performance information.
  5. Communicate Insights - Companies with a formal BPM approach report that they better communicate their insights.
  6. Decisions and Actions - Companies with a formal BPM approach report better execution of their decisions and actions.

You can download the survey at

Tuesday, August 31, 2004

Balanced Scorecard and Corporate Governance

Robert Kaplan adds an additional role the Balanced Scorecard can play to its already impressive feature list. Kaplan's article

Recent failures (Enron, Tyco, WorldCom) triggered several regulatory and legislative responses, including the Sarbanes-Oxley Act and new Securities and Exchange Commission-approved NYSE and Nasdaq governance listing standards. Currently, prior to a typical board meeting, members receive reams of paper that are difficult to wade through and make sense of. Kaplan says the risk now is that boards will become overly focused on regulatory compliance and corporate governance issues. As a result monitoring the company's overall strategy might not get the attention it deserves.

Kaplan has spotted an opportunity for his Balanced Scorecard in this situation: with only limited time available to review the information before the meetings and to perform their monitoring and governance functions, board members must receive the information that is most relevant to their governance responsibilities and that will enable them to more effectively participate in board meeting discussions.

Extending the Balanced Scorecard and strategy map framework to board members will enable them to perform more effectively and efficiently. First, the board should use the corporate strategy map and Balanced Scorecard, which together describe the company's strategy, as prime information sources. Second, it should produce a board scorecard to make clear board responsibilities and accountabilities. This provides a mechanism for the board to set objectives and subsequently review its performance.

Should Mr. Kaplan's idea be considered a valuable contribution to ensuring boards maximize shareholder value or do you believe his article must primarily be considered as a skillfull salespitch?

Monday, August 30, 2004

Managing for Value

Michael C. Mankins, managing partner of Marakon Associates, in the September 2004 HBR issue, once more measured what everybody already knows: typical company’s senior executives spend less than three days each month working together as a team, and in that time they devote less than three hours to strategic issues. Moreover, these three hours are seldom well spent. Strategy discussions tend to be diffuse and unstructured, only rarely designed to reach good decisions quickly.

One global firm spent more time each year selecting the company’s holiday card than debating its vital Africa strategy.

However at a number of Marakon clients — ABN AMRO, Alcan, Barclays, Boeing, Cadbury Schweppes, Cardinal Health, Gillette, Lloyds TSB, and Roche — executives have found ways to improve teamwork at the top. Leaders spend their time together addressing the issues that have the greatest impact on the company’s long-term value creation.

Based on the experiences at these companies, Mankins provides 7 techniques for exploiting valuable time of executive boards:

  1. Deal with operations separately from strategy
  2. Focus on decisions, not on discussions
  3. Measure the real value of every item on the agenda
  4. Get issues off the agenda as quickly as possible
  5. Put real choices on the table
  6. Adopt common decision-making processes and standards
  7. Make decisions stick

Mankins' article ("Stop Wasting Valuable Time") fits well in the Value Based Management tradition of Marakon Associates. My time reading this article was certainly not a waste of time and I recommend reading it to any topmanager and MBA student.

Thursday, August 12, 2004

Companies refering to VBM

Here I'm starting my modest collection of companies that refer to VBM having contributed to their results. If you see a statement with a publication date after August 12th 2004, please add it in a Comment!
Let's use the following Template as the first line of the Comment:
Name of the Company - Industry - Country - Publication type - Internet URL

Tuesday, June 29, 2004

Why Managing for Shareholder Value is hard

In the Journal of Strategy and Business, John Ballow from Accenture and Roland Bergman from AssetEconomics Holdings present 3 reasons why increasing shareholder value is difficult.
1. Managing for Future growth is hard, because its exact components are hard to identify and to understand.
2. Managing Intangibles is perplexing, because current accounting systems fail to track and analyze them (although they represent over 75% of all corporate value)
3. Deciding where to invest resources is hard, given the inability of current management tools to provide a reliable link between investments and the creation of shareholder value.
I would suggest to add at least 2 more reasons:
4. Getting your whole company to manage for shareholder value is hard and complex, since it often requires a change in culture, a substantial change initiative and CEO support.
5. Balancing Stakeholders interests with shareholder value creation also adds considerably to managerial complexity.