From Shareholder Value to Stakeholder Value
Some of the most significant sources of value for an organization are elusive, non-quantifiable and not easily discerned. One way to cast a wide-enough net for capturing these elusive elements of value is to take a stakeholder approach to the business as opposed to the traditional shareholder only view of everything. By taking this stakeholder view, resources are better utilized for long-term value creation. This approach to business can be bold in contrast to the shareholder type view, which tends to be somewhat traditional. We can begin by contrasting these two approaches:
A shareholder only approach usually has several characteristics, such as:
- Narrow Focus, driven by numbers and things that have been quantified and measured.
- Executive Management may react to valuations in dramatic ways (mergers, layoffs, etc.).
- Performance evaluation tends to be financially focused with little emphasis on intangible drivers of performance.
- Sources of value tend to be isolated systems, fragmented, and not coherent.
- Slow to respond to change; new ideas are not easily understood
- Management tends to quickly embrace a quick fix solution, sometimes adopting the latest fad despite the fact that it may not fit or it is not well-tested.
- People who create value may be viewed as “too radical” and somewhat out-of-step.
- The bottom line focus is on earnings.
- Traditional approaches to growth – allocate resources to marketing, acquire other companies, control costs, etc.
- Business success is what we create for our shareholders.
Contrary to a “shareholder” only viewpoint, stakeholder thinking tends to be deeper and broader. A stakeholder approach may include the following characteristics:
- Sustainable, competitive thinking that tends to be visionary.
- Multi-view of the organization regardless if it is quantifiable.
- Performance evaluations follow strategic issues, not just operations.
- Strong value systems across the entire value-chain, extending to external stakeholders
- Easy flow of new ideas and innovation (very change oriented).
- Management does not embrace quick fix solutions; instead opting to move cautiously and incrementally to avoid paying a heavy price.
- People who create value are most likely to advance within the organization.
- The bottom line focus is on value – what value are we adding?
- Growth through the intangibles – relationships, competitiveness, knowledge workers; thinking in terms of opportunities for growing the business around core competencies.
- Business success is what we create for all stakeholders, not just shareholders.
“A value is a belief in action. It is a choice about what is good or bad, important or unimportant. Values shape behavior. Until a value is acted upon it remains an aspiration. Values are hard to detect; yet they underpin organizations like the foundations of a house. If the foundation is weak, then the house falls down.”
- Unblocking Organizational Values by Dave Francis and Mike Woodcook
One way of moving away from shareholder value to stakeholder value is to identify the real drivers behind value creation for your stakeholders. These bottom layer drivers will give you great insight into what really works on reaching the upper shareholder layer of value. This type of thinking needs to permeate all levels of the organization so that eventually, everyone is asking the question: How does my behavior or actions impact value and what can I do to create more value?
“What people value causes organizations to have cultures and acquire the reputations they have. World-class companies usually have cutting-edge technology, superior management systems, outstanding electronic systems, and database management, but their reputations all come back to human beings – the people who make decisions and take actions in these organizations, while using technological and management systems and tools. One of the critical characteristics of successful companies is a careful balance between the values, interests, goals, and objectives of the organization, and the values of the individuals who work for it.”
- Value Driven Management: How to Create and Maximize Value over Time for Organizational Success by Randolph A. Pohlman and Gareth S. Gardiner with Ellen M. Heffes
One common trap to value creation is to become overly pre-occupied with metrics. You should not confuse value creation with value-based metrics. Value type metrics are widely accepted and understood – things like EVA, Cash Value Added, Return on Investment, etc. However, the biggest sources of value (things like leadership, innovation, ethical behavior, knowledge, etc.) are not easy to quantify.
“Value is added in the sense that the situation is better than if nothing was done at all. But value is destroyed in the sense that the optimal value has not yet been implemented.”
- The Value Mandate by Peter J. Clark and Stephen Neill
Value-creation is a constant and difficult struggle since we can't predict the future and many of the most important drivers of value are not measurable. Therefore, it may be appropriate to focus on only a few key drivers of value since organizational resources are limited. For example, one of the ultimate drivers of value resides in your people. So if you want to start at one single point on real value creation, begin with your human resource capital. One reason this is important is because people transcend and help you meet the value-proposition required by your other stakeholder groups – customers, suppliers, partners, etc. People represent the fluid dynamics that binds all stakeholders, covering the full range of value-creation in this age of stakeholder value and not just shareholder value.
“We don't believe in the word ‘measurement.' We don't supervise or manage people here; we lead. And we don't have employees; we have people. We don't have human resources; we have a people department. Our emotional contract with people is to treat them with respect, allow them to have input into the company, and allow them to self-actualize within their jobs.”
- Stephen Smith, CEO of WestJet
Written by: Matt H. Evans, CPA, CMA, CFM | Email: firstname.lastname@example.org | Phone: 1-877-807-8756
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