Maximizing Shareholder Value

The company had struggled through the near collapse of the American economy by doing what it had always done, they way it had always done it.  They clung to the Big Box model hoping that the economy would soon recover. It didn't.

The company had stoically resisted any changes for three years while being trounced by its largest competitor.  It sustained 14 quarters of dismal results all without feeling the need to change a single thing about the way it went to market.

None of these events was enough to convince the company I work for that things needed to change.

But then, one day, almost as if by magic, the company finally woke up and decided it needed to completely change everything about how it did business.

This revelation was not the product of deep thinking within the company.  Nor was it the outcome of some hotly contested deliberation of a strategic overhaul.  It was simply the result of one person, buying so many shares of the company, that he could not be ignored. 

An activist shareholder bought into my company and while I was not there to overhear the conversation, I am sure it went something like this:

“Mr. Chairman, I now own a significant portion of your company.  I would like you to change the way the company is run so that the shares I own are significantly more valuable in three to six months then they are now.   If you can not find a way to do that, I will replace you and your executive team with people that will.”

Simple individual self interest, that’s all it took to get my company to change.

Self interest, the power that drives the engine of capitalism. 

What finally motivated the company I work for to change was the realization by senior executives that they could either change the way the company operated, or they would loose their jobs. 

From that moment, the floodgates opened.  The company embarked on a multi-year, three pronged strategic shift that was designed to “Maximizing Shareholder Value.” 

The strategy consists, in simplest terms, of:

1. Manipulating the company’s finances to increase the share price. 
2. Introducing ‘Technology’ wherever and whenever possible and
3. Completely overhauling the corporate culture. 

There is nothing wrong with what the company is doing.  In many ways, maximizing shareholder value is exactly what a publicly traded company is supposed to do, it is by some definitions the only reason a public company exists at all. 

The problem lies in the definition of ‘Shareholder Value’.  My company is focused on getting the share price up regardless of how it impacts the company’s ability to function or even survive in the future.

Is a higher stock price the sole definition of shareholder value?

You can argue that it is because there would be no future, at least not for the executives in charge, if they don’t get the share price up right now.

The questions remains, however, does shareholder value mean the highest possible share price today or the value of the company over time?

It’s only a mental exercise.  In today’s market, there is no mechanism for looking at shareholder value over the long term.  The goal is to get the share price up as high as possible, as fast as possible and then struggle to keep it there.

The Big Box model of retailing relies on continuous growth to be effective.  There is no more real growth for Big Box stores in this economy so rather than finding a new model, my company has decided to continue with the same model but tweek its growth orientation away from more stores, more customers, and more sales to a focus on more ‘Shareholder Value’. 

It may be the only way the company can survive.  I would have liked to have seen a more creative solution to the problem of no growth/slow growth, but I am left with what I have.