Our Point of View
Management’s primary financial responsibility is to create shareholder wealth by enhancing the value of the capital with which it has been entrusted by shareholders.
In discharging its responsibility to enhance value and create shareholder wealth, the greatest challenge for any management team is to build an organisation that can create wealth not just once, but on an ongoing basis.
The only systematic way to create shareholder wealth on an ongoing basis is to focus at segment level and continually seek to develop and implement new and higher value segment strategies that will each deliver greater long term cash flow than the current strategy. Once the expected cash flows have been consolidated, management can then communicate its new and higher financial performance expectations to the capital markets.
The key to the continual development of higher value strategies at a segment level is to find ways to efficiently deliver additional value or benefit to customers, combined with an approach to pricing that sets price primarily on the basis of customer benefits received, rather than cost to serve.
In setting out to develop higher value strategies, it is important to appreciate that the best strategies are almost always developed by drawing on both creative and analytical modes of thought – and not by relying on logical analysis alone.
A higher value strategy will enhance the underlying or intrinsic value of a business by an amount equal to the present value of the expected increase in long term cash flow. This will only translate into an increase in market value if the capital markets reset their financial performance expectations in line with those of management.
Business leaders must understand both the nature and the size of any gap that exists between market value and their internal view of intrinsic value. They must also develop the skills to be able to close that gap over time.
If a company is to create customer value and build shareholder wealth in ways that also lead to the enhancement of community wellbeing, the value propositions it offers must not only create value for customers, they must also contribute to the creation of value for end consumers.
A business mindset focused on creating customer value, building shareholder wealth and enhancing community wellbeing, can lead to behaviours that deliver the win-win outcomes that governments, regulators, businesses and consumers have all been seeking for decades.