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Becoming a value manager is not a mysterious process that is open to only a few. It does require, however, a different perspective from that taken by many managers. It requires a focus on long-run cash flow returns, not quarter-to-quarter changes in earnings per share. It also requires a willingness to adopt a dispassionate, value-oriented view of corporate activities that recognizes businesses for what they are—investments in new productive capacity that either earn a return above their opportunity cost of capital or do not. The value manager’s perspective is characterized by an ability to take an outsider’s view of the business and by a willingness to act on opportunities to create incremental value. Finally, and most important, it includes the need to develop and institutionalize a managing value philosophy throughout the organization. Focusing on shareholder value is not a one-time task to be done only when outside pressure from shareholders emerges or potential acquirers emerge, but rather an ongoing initiative.
The process of becoming value-oriented has two distinct aspects. The first involves a restructuring that unleashes value trapped within the company. The immediate results from such actions can range from moderate to spectacular; for example, share prices that double or triple in a matter of months. At the same time, the price to be paid for such results can be high. It can involve divestitures and layoffs. Management can avoid the need for cataclysmic change in the future by embracing the second aspect of the managing value process: developing a value-oriented approach to leading and managing their companies after the restructuring. This involves establishing priorities based on value creation; gearing planning, performance measurement, and incentive compensation systems toward shareholder value; and communicating with investors in terms of value creation.
By taking these steps to ensure that managing value becomes a routine part of decision making and operations, management can keep the gap narrow between potential and actual value-creation performance. Consequently, the need for major restructuring that goes with large performance gaps will be less likely to arise. Those who manage value well can guide their companies in a series of smaller steps to the higher levels of performance that even the most comprehensive of restructurings cannot match.
We illustrate the integrated application of value management principles by presenting a case example distilled from the real-world experiences of client executives with whom we have worked. Our purpose is to show the process of transforming a company in terms of value to shareholders and management philosophy.