Platt Perspective on Business and Technology

When shareholder value becomes an enemy of strategy and strategic planning

Posted in macroeconomics by Timothy Platt on September 18, 2012

I read the business section of my local newspaper, the New York Times, and follow a variety of other news and information channels in the course of my day to day life, as many people do. And like most of us I pay at least some attention to what the stock market analysts have to say. So much of what I could write about here is an old and familiar story to most of the people who would read this blog or resources like it. Stock market analysts work on a very short timeline and tend to take a short timeframe perspective, and at times a myopic one at that. Their evaluations and ratings are almost entirely based on the immediate here-and-now of current Price-Earnings (P-E) Ratios and similar metrics, and on immediate here and now sales figures and revenue and profit numbers, and how they match up to those analysts’ current expectations.

An immediate here-and-now snapshot understanding of where a business is at this point in time can be crucial for its success, and as a working example of where that applies I cite liquidity and the central importance of knowing levels of cash at hand, and of assets that could be very quickly converted into cash. But strategy by its very nature has to take a longer term perspective and strategic planning looks beyond the immediate here-and-now. That at least is the basic received wisdom that we all hear and that we all, myself included, tend to think and at the very least as a default position.

• Strategy is long-term in its planning and execution; tactics are here-and-now and short-term in planning and execution.
• But what about strategy and strategic planning during a period of rapid change and uncertainty? Timeframes can and do collapse in and they have to.
• What about tactical planning and execution for stable and essentially fixed operations, and absent the challenge of change or need for it? Standard operational procedures can endure as fixtures of a business in ways that outlive any specific strategic planning or scenario and certainly for established businesses in stable mature markets and for heavily regulated aspects of a business’ overall operations.

So I would begin this posting by adding at least a strong potential for caveats to any one size fits all assumptions about timeframes and certainly for strategy and tactics. What might be more usual does not and should not always apply. But that said, I come to the basic dynamic that I hint at in the title of this posting: “when shareholder value becomes an enemy of strategy and strategic planning.” And in this, timeframe differences are important.

• Stockholders definitely read those stock market analyst reports and come away from them with a settled and expert-validated sense of knowing what the businesses they invest in are worth and how those businesses and their investments in them are doing.
• And the senior executives who run those businesses read the same market analysts too, and so do the board members they report to. And that is where problems can and do arise.

That is because strategy often and even usually does play out over longer timeframes than any market analyst would consider. Strategy has to go beyond the here-and-now and beyond the end of the current quarter. And when what should be long term decision making is carried out too much in response to short term reviews and opinions, that can and does lead to a longer term strategic blindness and loss of longer term opportunity. This can and does become a source of strategic weakness when the CEO and their executive team see their performance and their compensation set by a board that follows those market analyst reports as a reliable performance determinant. And as readily visible and publically discussed views as to overall business performance, boards face pressures to do exactly that. And this can also lead to their favoring and selecting senior executives starting with the CEO for their focus on those short term numbers. And this can lead to the type of short term thinking that we, as a working example, have seen in the Financial industry over the past several years. Many of its largest institutions have followed a short term focus that leads to longer term risk, and of a type that can and with time will catch up with any business if repeatedly pursued.

So I started this posting writing about timeframes and the limitations of stock market analyst findings and reports, and I quickly find myself looking at the types of long term blindness that lead to business weakness and the strategic long term failures that gave us the Great Recession, at least as an extreme case. An awareness of timeframes is important, and both in business analysis and in business strategy and the execution of that strategy. And the interests and priorities that one group follows in setting the timeframes they work under can differ and be in conflict with those of others.

• Overreliance on short term evaluations of business performance and valuation coming from market analyst reports, at the very least contributed to creating a business environment that made the Great Recession more possible, and certainly where senior executive and particularly CEO compensation was linked to those findings.

I am not saying that individual greed did not play a role, as it certainly did. And for some executives and some businesses, greed and even strategically conceived and executed predatory behavior did occur and very systematically so. But much of the underlying strategic failure that led to the Great Recession was more structural in nature, and coming from what has even become standard board practice in evaluating CEO performance. And any long term remediation of that has to involve a deep reevaluation of how those outside, short timeframe reviews and analyses are used within a business and by its executives and board members.

• Shareholder value, or at least the unconsidered drive to determine its value and to maximize it, on a short term basis and only from a short term focus, really can be an enemy of long term business stability, planning, execution and strength.

And I add this to my ongoing postings on regulatory control and oversight and on business strategy and operations best practices. You can find this and related postings at Macroeconomics and Business and also see Business Strategy and Operations and its continuation page .

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