Maximizing Shareholder Value Pert 2

The first step in the company’s strategic shift to ‘Maximizing Shareholder Value’ is the manipulation of the company’s financials.  Stock price can most easily be affected by direct manipulation of the factors that control price. 

The first thing the company did was to announce a huge stock buy back program.  They actually borrowed money to buy back shares of their own stock.  By having more money chasing fewer shares, the price of those shares remaining has to go up. 

Simple supply and demand, increase the demand for shares by flooding the market with ‘buy’ orders while limiting the supply of shares you offer and you have higher prices.

The next step was to increase the dividend.  By paying back more money to shareholders through dividends, the shares themselves have more value and therefore trade at higher prices. 

Short term this is great for the stock price, long term, not so much.  What the company is doing is openly admitting that they can’t think of anything to do with retained earnings that will make the company more valuable. Rather than risk trying to invest the money the company has back into the company, they have decided that the best course of action is to give the money back to shareholders. 

What the company is saying is in essence, “Our organization is so screwed up that we don’t even want to try and fix it. We are afraid that any money we spend trying to get our company to run better would be wasted, so we would rather just give the money back to you and ride this thing all the way into the ground”. 

That is great for shareholders and really great for executives and board members whose compensation is tied directly to share price.

It is not so good for everyday employees who now have to worry that the company the where they have worked for so long might not be here in a couple of years, but hey, that’s the way modern capitalism in our market based society works.  

Bad company management, good maximization of shareholder value. 

Rather than trying to make money for shareholders off of what they have invested, the company is simply going to give the money back and hope that we can give it back fast enough that the share price keeps rising. 

And it worked, the share price shot up 60% in a few months.  Wall Street loves a good deal and giving back money to shareholders with a little something added on from the sale of the company’s future is a good deal on Wall Street.

It doesn’t matter that the company has hindered its ability to function in a tough competitive market.  It doesn’t matter that they will have no “War Chest” to rely on if another jolt comes to the economy or the market they are in.  It doesn’t matter that they have sold off the company’s future for a better stock price today, because a better stock price today is all that matters when you are maximizing shareholder value.      

Combined with the buying back of stock and the increases in dividends is the manipulation of earnings per share.  Hitting specific earnings numbers has become more important than how those earnings are…well…..earned.  

For the next couple of quarters and perhaps the next couple of years, my company will be achieving earnings growth through the manipulation of the internal numbers of the company rather than through real growth or acquisition.  Reduce the number of shares outstanding and you can achieve growth in Earnings Per share.  (Less shares divided into the same amount of earnings gives you greater per share earnings growth.).

Lower expenses faster than sales decline and you achieve earnings growth.  Limiting the amount of inventory you carry and you have more money to add to the earnings line on the balance sheet.  The fact that you can’t sell what you don’t have won’t show up for at least a few more quarters.  Between now and then you can try to find another way to get the earnings up. 

Then there is the cutting back of pay and benefits for employees.  That has a similar effect on earnings and it is not as noticeable to share holders as when you close a number of stores and throw people out into the street.  By limiting what an employee can earn and reducing what they cost for the company you can improve earnings.  Again, the results of these changes will not show up for a while so you take the earnings increase now, get that reflected in higher share prices and worry about the downside effects of the decision at some later date. 

This and a myriad of other accounting manipulations are going on in my company on a daily basis.  It is the first prong of the strategy to increase Shareholder Value and its effect on share price has been incredibly positive. So far, so good, as far as shareholder value is concerned.

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.

Tan, Rested and Ready

It's time to get back to work.

I've been gone, but now I'm back. Where I went and why is not really important, mostly because no one else would care.

I have been in the middle of one the great cyclical transitions in retail.  These transitional events happen on a regular, if not frequent, basis.  They are times of great confusion where big companies loose their way and struggle against market forces, competition and their own myopic views to survive in an economy that has changed without them realizing it.

Then one day, they wake up and accept that the way they have been operating is no longer working.

I have been given a inside view into how one Big Box Retailer is handling (or not handling) this realization and how they are struggling to remake themselves.

There is a great deal to learn from the their efforts.  In the coming weeks I will be trying to share what I have seen.

I want to offer up some insight that may be of value for other companies, and individuals who can then profit from knowing where this former Master of the Retail Universe stumbled and how it is now struggling to remake itself.

Big Box Blues: The Next Chapter

For almost two years I have been rambling on about the demise of the big box retail industry.

I have postulated that our current economic situation, highlighted by high unemployment, tight credit and slower GDP growth, will be with us for years. It has been my hypothesis that a low growth economy will end the reign of Big Box retail due to the model’s over reliance on the opening of new stores and the attraction of new customers.

Blah, blah, blah is what most people heard. The evidence just wasn’t there.

“You’re a bitter old man with a loose grip on reality.” Is what my closest friends and most of my family members have been telling me.

But before shuffling off to watch The Simpson’s, I was quick to respond:

“Sure I’m bitter, but you’d be too if they kept changing the packaging for Publix ice cream … and sometimes I see things that aren’t really there, but does that mean I’m wrong?”

But now, I think my screwball ideas might just be coming to light. Wall Street sharks are circling in the economic moats that Big Box retailers have built to protect their kingdoms.

Wall Street bought the shares of Big Box stores and rode a wave of phenomenal growth and spectacular returns for 20 years. But after 6 quarters of declining same store sales, Wall Street is looking for a better return on the assets retailers hold, than the management of these Big Box firms have been able to provide.

For Wall Street…It’s payback time.

Ron Burkle and his boys take a run at Barnes and Noble, Blockbuster just folds, Gymboree takes a sweetheart deal from Bain Capital and JC Penney runs for cover into the arms of Goldman Sacks (?) to fend off Bill Ackman's hedge fund Pershing Square Capital Management (which, by the way, just got done chasing after Borders).

I don’t think these are isolated events.

I think this is a warning shot for Big Box executives to get the cash they are hoarding back into productive use, to fish or cut bait regarding under performing stores and to find a new retailing model that can keep the sharks satiated.

Can Big Box respond fast enough for Wall Street? My thoughts…? No way!

There just isn’t enough original thinking inside the vaulted HQ to get it right fast enough.

Wall Street created these behemoths and they will dismantle the firms they can, and merge the ones they can’t, until the last drop of whatever value is in the assets is squeezed out.

When it’s over, there will be empty shells of retail companies all over this great land.

Out of the carnage will rise the new retail models that can survive in a low growth economy, at least until the sharks regroup and get hungry enough.

It’s moments of lucidity like this that I live for.. that and Publix ice cream sundaes!

I’m the most popular person in America!! (Well, almost)

It’s official.

The Retail Salesperson is the most popular job title in America according to The Bureau of Labor Statistics 2010-2011 Occupational Outlook Handbook, and of course, my Yahoo homepage http://finance.yahoo.com/family-home/article/110348/the-popularity-issue.

In May of 2009, the BLS stated that 4.2 million people were paid an annual median salary of $20,260.00 to stand in one place for long periods of time, to work weekends, evenings and holidays, and to endure limited advancement opportunities, just so the American populace could get their fill of groceries, hardware supplies and back to school clothes.

If you add in Cashiers (3.4 million), Food Service workers (2.7 million) and general office clerks (2.8 million); that’s a grand total of 13.1 million people uttering the phrase “May I help you?’ some 90 million times each day.

Actually it isn’t a phrase. More often it’s uttered as a single word: “myelpu?”

So 13 million of us get up at the crack of dawn, put on a vest or name tag and struggle through a day of monotony and anonymity.

But sometimes we do get noticed.

By now the name Steven Slater is etched into the minds of each of us in the customer service business. His spectacular exit from a JetBlue aircraft and the company’s employment are the stuff of break room fantasies. Watch his exit here: http://extratv.warnerbros.com/2010/08/watch_steven_slaters_jetblue_slide_escape.php

His life will now be endlessly analyzed, and continuously debated through at least a week of news cycles. His actions will be celebrated, derided and contextualized to support whatever concept countless numbers of pundits care to make.

But I fear that the real issue, as I see it, behind both his actions and the cord it struck with the American people will go unexamined and unmentioned.

Anyone who has worked with the general public can tell you horror stories about the customers they have had to deal with. When pressed, however, they will admit that the vast majority of customers are really very easy to help and that more than most are appreciative.

Conversely, we have all had our fair share of run ins with nametag wearing obstacles whose sole function is to stand between us and the items we came to purchase. Here too, we have to admit that while we may focus on the negative, most of our interactions at retail are without conflict or angst.

So why has this extraordinarily unrestrained act of quitting generated so much interest and discussion?

It’s because at its most basic level it highlights the conflict between entitlement and frustration inherent in the world of big box retail.

My point.

Customers are continuously bombarded with ever inflated promises about what they can expect when they enter a big box retail store. Promises that are from their very inception deceptive. They expect to find legions of expert staffing and products at ridiculously low prices, in endless quantities and varieties. It’s not only a fantasy, but it’s also a model for economic disaster.

What they fail to realize is that the powers that be in the big box retail world care more about customers as a concept than customers as a reality. They worry endlessly about the idea of a “customer”, but could actually care less about a single, actual customer.

Now shareholders, that’s a different matter entirely. But shareholders are easier to keep happy than customers. Customers don’t always know what they want. Shareholders, however, just want you to hit the numbers. Reduce payroll, increase margin and limit inventory and then the shareholders are happy. Customers? Not so much.

Retail workers don’t have the privilege of dealing with customers conceptually; they have to deal with them in the flesh, each one an individual in a very specific time and place. It’s the retail workers lot to try and deliver on the false promises created by the big box marketing machine.

It all too often ends in failure for the customer, which generates disappointment and frustration.

The Retail worker is not immune from this frustration. No one gets up in the morning looking forward to creating disappointment and anger among legions of basically blameless individuals.

Unless of course you are a politician running for office.

So over time, the frustration builds in the customer. To meet this frustration, and to avoid admitting that their promises were false, big companies have enacted extremely liberal policies that are designed to “empower” the customer to the point that the customer feels as though their will should be enough to change the laws of physics.

This “empowerment” condones customers venting their frustration powerfully and continuously until product that isn’t there magically appears, until prices reach the point of negative numbers and until every employee in a five mile radius is summoned to do their bidding.

Retail workers are left to their own devices in trying to meet the demands of these corporately empowered customers.

As customers feel more and more entitled, retail workers get more and more frustrated.

So then, when the customers sense of entitlement leads to anger that they feel perfectly comfortable expressing in a physically damaging way, the retail worker hits a point where the glory of 12 hour days, the comfort of knowing that you will be doing the same thing for the next 20 years and the allure of a princely $20,000 a year in annual income just can’t hold the frustration back any longer.

KABOOM!!

Grab the beer, yank the emergency handle and slide off into the sunset of frustrated worker legend.

There has to be a better way.

Normally I would implore big box managers to examine how they handle both customers and employees and to make changes to policy that can mitigate these types of damaging interactions.

But because of the fact that there are more of us working in customer service than in any other industry in the country, I think It’s time we look to ourselves for solutions.

If you are a customer service worker, look at yourself as a member of a grand profession. Not glorious, but certainly numerous. You can look to your right or left in any crowd and see another soul in the same high frustration job and draw solace. There are more of us than there are of them. More hard working Customer Service professionals than overly-entitled customers and we need to help each other.

Stop and think about the guy serving us coffee on our way to work. He’s one of the 13 million. He shares more in common with you than you might think. Give a smile, take a breath and realize that he has to transact your purchase with a crappy computer system the same way you will for the next 10 hours. Remember the frustration and take a second to acknowledged that what we do, what 13.1 million of us do, is difficult, and demanding.

Lets’ each take a moment to give each other, and ourselves the break we need to do our jobs. There’s a ton of us out there and if we start thinking about how we can work together, there is no telling the changes that can be made

I took the summer off.

I took the summer off.

Actually, it was a forced vacation. I developed the biggest case of writer’s block since…well… since the last guy who suffered writer’s block.

See, still suffering.

While I seemed to have spent most of the summer doing nothing, I recently realized that I had been working.

My affliction with the written word forced me to shut up long enough to actually listen to other people, people who could not have disagreed with me more about the future of retail. Folks who felt that things were just starting to get around to normal. I knew they were wrong, but every time I tried to write about why and how they were wrong, the words simply wouldn’t come.

And for a while, it seemed that they might be right. In the beginning of the summer the economy was improving as judged by the return of the Dow industrials to a post 10,000 level, the moderation in the unemployment figures, and a slight rebound in retail sales.

Big Box retailers had trimmed overhead, meaning that they had stopped hiring replacement workers and that they had let inventory levels fall to disastrously low levels. But prices had stabilized and margins had returned. “See”, they would tell me, “The worst is over and things are going to be just fine”.

I seethed with my inability to contradict them in print.

I choked on every attempt to point out the fallacy of their arguments. I tried and tried to write about the disastrous effects of the decline in service levels and the irreparable harm that comes from sales lost to overly efficient (read non-existent) inventories.

I banged on the keyboard trying to communicate exactly how theses short sighted cost cutting strategies executed by large retailers would simply pave the way for new, innovative retailers to come along and eat the big boys for lunch. But the words would drop out of the computer and turn to absolute drivel (you may argue that this drivel continues, but hey, I gotta blast through this block somehow).

“The numbers”, I was constantly reminded, “simply don’t support your gloom and doom scenarios”.

Maybe, but something is going on that the numbers don’t show. I know it, but as yet I can’t articulate it.

My retreat from the confines of the hovel where I write also allowed me to listen to the voices of customers when they weren’t being customers. Since writers are notoriously unsocial beings, I used my kids as cover and did what all great writers do, I eavesdropped on conversations I had no business listening to.

As I sat by the pool sipping margaritas (ok, so it was the community pool and the margaritas were actually caffeine free Diet Cokes) , I listened to people from all walks of life and in all types of financial situations talking about how they were changing the way they shop and how they pay for those purchases.

Most are done buying on credit, either because they are forced to pay with cash because of their financial situation or because they have vowed not to get into debt of any kind.

Lots had mailed in the keys to their homes and were looking to rent for the foreseeable future.

Everybody was talking about what they were doing to cut back on spending because they didn’t have the money or, more often than not, because they were scared about spending any of the money that they had. Those with money weren’t interested in spending, because they didn’t know how long it would have to last.

Many had given up looking for work and were in the midst of starting a small business. Anything they could get into for as little capital as possible. They were starting landscaping businesses, handy man services, dog grooming, dog sitting and dog walking business. They were selling homemade jewelry at the farmers market, canning vegetables, making home made soaps; you name any small time business operation, and somebody at the pool was starting one.

On the other side of the pool, different people were talking about how they had stopped using their national franchise grass cutting service and had switched to a local guy because his prices were competitive and he showed up when he said he would. Others talked about firing their contractor because they found a great handyman who would take on even the smallest job and who did great work. Still more where raving about the home made products they bought at the farmers market because they were better made and cheaper that what they could get in the stores.

“Hmmmm” I thought. And since I couldn’t bring myself to write a friggin’ word, I was left with thinking and going “Hmmmmm”.

On the sales floor the sentiments were the same. Customers had changed the types of projects they were taking on. Doing just enough to get by and not going whole hog. Repairing instead of replacing, painting instead of remodeling, fixing instead of buying new. Sure, they were spending at a level close to what they had spent in the past, but something was very different. The business was better, but it wasn’t the same kind of business as it had been before the recent “Economic Unpleasantness.”

The numbers were showing that the sales were coming back, but the numbers weren’t showing that the type of business we were now doing wasn’t the same type of business we had done “before”.

The powers that be starting talking about how things were going back to normal and while I couldn’t see that happening, I had to admit that something certainly was happening. What it was wasn’t clear.

I had been expecting to see a new type of retail model rise out of the ashes of the economic collapse. That hasn’t happened…yet. Right now it seems as though the “old” Big Box model is being used by customers in a completely different way

If so, then the question is, can Big Box change to accommodate this new shopping pattern and this new economy or will it turn those customers away unsatisfied. How long will customers put up with limited product offerings and lackluster service regardless of the pricing? How long will lower prices stay and how long will it be enough? A gallon of paint is a gallon of paint, but when it’s purchased by a homeowner rather than a contractor, then it becomes a completely different product.

The dollar sale is the same, but the process of completing that sale successfully is completely different.

As the customers came back into the store this summer, I noticed they needed a good deal of hand holding. The wanted more information from the sales associates, who where virtually non-existent and they were looking for products that we were out of stock on or which we didn’t carry.

Big Box has yet to adjust to these new shopping patterns, right now they are just happy to see more shoppers, they have yet to tune into the changes these shoppers are making. Will Big Box adjust? Can Big Box adjust?

I don’t have the answers, but at least now I think I understand the questions.

Improvise, adapt and overcome

Improvise, adapt and overcome;

That’s the unofficial motto of the United Sates Marine Corps. It summarizes how Marines accomplish their mission objectives in difficult circumstances.

I have never been brave enough or tough enough to be a Marine, but then, few people are.

I have always been impressed by how succinctly those three words; Improvise, Adapt, Overcome, encapsulate exactly what it takes to be successful .

No plan can ever anticipate exactly how things are going to go in real life. In the business world, no plan can ever predict exactly what the competitive environment will look like, how the customers will react or even how well your own staff will execute.

That’s why retailers in the future, meaning now, would be wise to take a page or two from the Marine Corp handbook. They need to make sure that the people they bring into their organizations have the ability, and the freedom, to Improvise, Adapt and Overcome.

In the future, as in right now, retailers that want to succeed need to:

• Hire the right people
• Compensate those people competitively
• Train those people
• Give those people clear mission objectives
• Instill in those people a culture of success

Successful retailers hire the best people then can possibly get. It sounds trite to say that every employee should have the potential of one day running the company, but trite as it may be, that is exactly the type of person you should be hiring. Successful retailers look for people who want grow along with the company. They need people who are committed to learning and who are looking forward to taking on progressively more responsibility. They are looking for people who think like owners.

To get those types of employees, successful retailers offer competitive compensation. That’s more than just a good hourly wage. It includes health benefits, career training, sufficient time off, potential for profit sharing and a clear explanation of what it takes to progress through the organization.

Also, successful retailers look for employees that are not just interviewing with the company, but who are also interviewing the company. The effect of the recent economic unpleasantness has people looking for solid, well lead companies that can be competitive in the future. The right employees will ask about the company’s commitment to technology, their plans for growth and maybe even ask to see the company’s financials. This should be seen as a sign that you are looking at the right person rather than as an imposition. Today’s productive employees think of themselves as independent contractors looking for a business partnership as well as a job. At least, the right employees are.

Getting the right employee is a great start, but you won’t have them long unless you give them the right training. In addition to learning the basics about company policy, proper procedures and suitable conduct; successful retailers are teaching employees how to read balance sheets and P&L statements. They are conducting seminars on product development, vendor relationships and the ins and outs of overseas sourcing. They are providing sales training that goes beyond the meet and greet to courses on proper body language, overcoming objections and developing meaningful rapport with customers.

There is a wealth of training available that can be delivered in written form, though community college classes and via the internet that smart retailers are capitalizing on. Successful retailers hire employees that want to learn and then they are offering them the tools to gain tha t additional knowledge.

Smart retailers are also using employees as trainers. Nothing cements a culture like the passing down of knowledge from an elder. Having employees teach each other attaches validity to the information that is critically valuable.

Well chosen and well trained employees are most successful when they can internalize the company’s overall objectives. Clear objectives, broad in scope and set in the mid to long term (6 months to 3 years) work best. Don’t try and put objectives on a coffee mug. They need to be clear and simple, not catchy and overly cute.

While there should be as little restraint placed on the employee trying to achieve an objective as possible, do set limits. Engaging employees in the development of specific strategies helps them gain an understanding of what the company wants accomplished and creates self imposed parameters. Employee participation in strategic (and later tactical) development gains the all important employee buy-in and acts as a built in B**L S**T detector, you can never be too aware of just how out of touch with things on the front lines you may be.

Set milestones to measure progress and to prove you are serious. What gets measured, gets done. Ongoing reporting will help to direct employees towards those milestones and will re-enforce the company’s commitment to that progress. Along with the reporting should be a system for providing guidance that will help employees in reaching the company’s objectives. Guidance can be stories of how others have succeeded, a demonstration of how progress to date is affecting the growth and or health of the organization or specific training given to high performers as well as lagging employees.

This commitment to achievement brings us to the last point: Creating a culture of success. You can hire the best, compensate them better than anybody else and give them the best training in the world, but unless you expect great things, great things will never occur.

Set high expectations and celebrate the achievement of those expectations. Tell the stories of heroes, those who have Improvised, Adapted and Overcome. Create a mythology surrounding past achievements and continue to look for opportunities to add stories to that mythology.

Reward those who do an exceptional job and… as harsh as this sounds… get rid of those who simply can’t cut it. Nothing builds morale better than the termination of an employee who clearly is not achieving. Now, don’t mistake this for using termination as a motivator. No one works well under the pressure of losing their job. I’m talking about removing an employee who has been given every chance for success and for one reason or another has not been able to succeed.

In the end, the retail world of tomorrow, which started yesterday in case you were wondering, will be a place where success or failure happens in the stores. Wining retailers will be flexible, nimble and instantly responsive. Successful retailers will staff their stores with people motivated to improvise, adapt and overcome.

Already, smaller companies are stealing market share from big box stores by focusing on having the right management and staff, and by committing to giving them the best training possible. Then they give them clear and concise business objects for them to accomplish.

Once you can do that, then you can have your management and staff meet any business situation, no matter how difficult by allowing them to Improvise, Adapt and Overcome.