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Lessons in Shareholder Value

Lessons in Shareholder Value

To deliver real value to the business, CIOs must make all investment decisions with the company's long-term goals in mind

CIOS AND CFOS may not always see eye-to-eye, but one topic is dear to the hearts of both, and that's value. CIOs aim to create value through the efforts of their IT organisation and the systems and technology the organisation implements; CFOs seek to guarantee that value is delivered enterprisewide. Unfortunately, value is one of those terms that everyone loves to throw into a conversation as evidence of the importance of their efforts, often without a clear, consistent meaning. The picture gets even murkier when you take into account all the metrics and methods out there that claim to capture this mysterious thing we call value: ROI, net present value, the Balanced Scorecard and the like, as well as external indicators such as the stock price. It can be a confusing mess.

How should value be defined? It all comes down to whether you've increased the wealth of the organisation's shareholders. If you have, you've succeeded in creating value; if you haven't increased that wealth, you haven't created value. Shareholder value is what it's all about.

What It Is - and Isn't

In simplistic terms, every for-profit organisation's goal is to create consistent, profitable growth for the company and a return to the investor that is consistently above what he could earn somewhere else at a similar risk. When you improve that return on investment, you're creating shareholder value. It is critical to remember that all investments an organisation makes should create shareholder value; if they don't, then the money is better spent elsewhere.

Management's job is to find the right businesses, strategies and investments that consistently grow the company's profitably over time. Conceptually this is not difficult to grasp, but there are several factors that make achieving that goal decidedly unclear.

First, there is no single metric you can use on an operational level to measure shareholder value. It is a high-level, multifaceted and long-term concept, and there is no single number you can use to guide decision making. The best way to measure shareholder value is to break it down into a series of smaller-scale metrics that, put together in the right proportions, demonstrate shareholder value. Those smaller metrics are the ones you see being used in varying combinations in an organisation's day-to-day operations - things such as net income, earnings per share and so on.

A company can track its day-to-day process and operational metrics to demonstrate that it is achieving its short-term goals, which, by design and in aggregate, help support its long-term plans for delivering shareholder value. A critical point to remember, though, is that those metrics are directly linked only to the short-term objectives; doing well on them individually says nothing per se about whether the company is creating shareholder value.

That is often where trouble arises, such as what we saw during the dotcom frenzy, when everyone assumed that high stock prices meant a company was delivering real value. Enron also looked great based on stock price and appeared to be growing, but in reality those were empty measures that didn't reflect shareholder value.

The bottom line: shareholder value is a long-term notion that's very complex to compute. Short-term indicators such as revenue, stock price and growth don't necessarily say anything about shareholder value, especially when you look at them in isolation.

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