The Imperative of Sustainability
S ince we published our last Value Creators re- port, in September 2008, global capital mar- kets have been buffeted by financial crisis and economic recession.1 Equity values have de- clined precipitously, and although they have recently been on an upswing from their March 2009 lows, capital markets remain risk averse and stock prices are still nowhere near their 2007 levels. And despite some signs that suggest the beginnings of a recovery, no one re- ally knows whether that recovery will be strong or simply a weak prelude to a double-dip recession and subsequent years of sluggish growth.
Why Shareholder Value Still Matters
In so volatile and uncertain an environment, it should be no surprise that the lion’s share of management attention has turned inward. Many senior executives have, quite rightly, been focusing on the cost cutting and restructur- ing necessary to maximize cash flow, strengthen the bal- ance sheet, and ensure their company’s liquidity and im- mediate financial survival. They haven’t been giving much thought to how they will deliver superior returns to shareholders in the years to come.
Indeed, some senior executives have come to question the very principle of managing for shareholder value itself. Even Jack Welch, former chairman and CEO of General Electric, a company famous for its year-aer-year delivery against quarterly earnings-per-share (EPS) estimates, told the Financial Times in March that “on the face of it, share- holder value is the dumbest idea in the world.”2
have always believed that value management is about creating value over the long term, not submitting to the tyranny of exceeding quarterly earnings estimates. We also think that many of the stock-based executive- compensation plans supposedly designed to “pay for performance” have actually contributed to an overem- phasis on short-term results to the neglect of long-term risks.3
And yet, we are also convinced that given the uncertainty of today’s economy, the concepts and tools of sharehold- er value management are more important than ever be- fore. It is precisely in times of high uncertainty that com- panies have to make carefully targeted bets. Recessions typically accelerate the forces reshaping industries and create new winners and losers in the struggle for compet- itive advantage.4 Mature industries face growing pres- sures to consolidate; companies with inefficient business models are weeded out by the tougher economic climate; and those companies that figure out how to exploit the downturn to improve their competitive position emerge as the new leaders of their industries. In effect, the down- turn is creating a playing field in which apparently small differences between competitors are going to translate into major—and potentially game-changing—differences in a company’s ability to create competitive advantage and, therefore, to deliver superior shareholder value over the long term.
1. See Missing Link: Focusing Corporate Strategy on Value Creation, The 2008 Value Creators Report, September 2008.
2. See Francesco Guerrera, “Welch Condemns Share Price Focus,” Financial Times, March 12, 2009.
Welch is right not so much about the concepts and tools of value management but about how they have been misused by many companies in recent years. At BCG, we
3. See Fixing What’s Wrong with Executive Compensation, BCG White Paper, June 2009.
4. See Collateral Damage, Part 5: Confronting the New Realities of a World in Crisis, BCG White Paper, March 2009.
T B C G