This second in a series of articles from Simon Court of Value Partnership explores why management is a key value driver.
Ask a venture capitalist about the deals that went wrong and they will tell you about management failure. Talk to an outstanding CEO like Jack Welch or John Browne and listen to the emphasis they place on getting the quality of management right and the amount of time they personally invest in this. Managers make a business succeed or fail though their decisions and behaviour.
What's the evidence for this? Shareholder Value Magazine recently published "The Shareholder Value 100" in an effort to quantify the contribution of management. The Indicator estimates the annual financial contribution to shareholders, considering the company's stock returns (from price history and dividends), its size, risk level, and how others in the market have performed. All the activities involved in running the business are reflected in the financial contribution. Rankings are based on five years of returns to avoid the short-term vagaries of the market. The management contribution or "Extraordinary Return Rate" is viewed by the designers of the measure as "comparable to a budget or expense item" when annualised in dollars per year and a "measure of management skill". For example, in the 5 years up to 31st July 2000, BP Amoco had an Extraordinary Return Rate of 6.37%. This equates to an annualised management contribution of $11,944m. For Reuters, the ERR over the same period was 13.14%, but because the total market capitalisation of the company is lower, the annualised management contribution was less at $2,612m. These figures show how much value good management can create and how important size is in affecting returns.
Let's look at a specific company to explore the significance of management in a bit more detail. Boots are a company that made steady progress relative to peers in terms of shareholder value during the 1990s. By the end of the 90s, however, the progress faltered. Why? The view within Boots was that the company had not developed the management capabilities to "constantly search for new strategies, structures and processes". Managers in Boots are expected to manage to two agendas (see below). Although managers generally delivered on their "Implementation Agenda", they did not deliver on their "Development Agenda" typically. This has led to a major effort on the part of senior managers to focus on reviewing and enhancing management capability and has brought this issue to the centre of the company's "managing for value" programme. The company now deliberately stretches people through strategic projects, international assignments and other moves.
A manager in Boots is expected to work to two agendas:
Implementation Agenda
- -Major projects that will deliver the current strategy
- -Issues and alternatives about implementation
- -Probably already in the share price
- -Delivery will return cost of capital
Development Agenda
- Issues which could yield a new strategy or modification to current strategy
- The major source of good surprises
- Probably not already in the share price
- Delivery will create "excess value"
The argument is about more than just economics; it is also about sustainability. Things are different today. The growing rate of change and level of competitiveness are particularly striking. Business models last for shorter and shorter time frames and because of the convergence of industries and the globalisation of markets, companies are facing competition from many and varied sources. Don't perform and you will be swept aside, as many famous names have been. Many organisations, in both the public and the private sectors, are realising that they need to do more than just deliver today's strategy and that they, like Boots, have to find ways to really step up their performance.
In addition to this need for new strategies and business models there is also an imperative to consistently deliver the current business model. This should not be undervalued because it is less glamorous or dynamic than "good surprises". Throughout the typical company managers make daily decisions to:
- Anticipate customer requirements
- Plan and design products or processes
- Acquire materials
- Build products
- Market, sell and service products
- Manage information and initiatives
- Manage and develop people
The cumulative effect of these decisions goes a long way to explaining corporate performance. Ericsson, the world's third largest supplier of mobile phones, is outsourcing handset manufacturing to try to stem huge losses in its consumer products division. These losses can be attributed to management failure throughout the "value chain" described above, particularly product design/range and late delivery of products such as WAP. This is of course relative failure: Nokia has managed its handset business better.
In the next item we will explore using an organisation and management review (OMR) as the basis for quality decisions about developing management capability for sustained business performance. Our article will advise you on how to lead the OMR process in your organisation.
