16 November 2020
Executives & Their Role in Sustaining Long Term Value Creation
Value creation is always at the forefront of investors’ minds when analysing company performance. Multiple studies over the years have identified that companies with executives who focus on decisions and investments with long-term objectives in mind inherently create more value. It is imperative that the actions of executives seek to not only address investors and shareholders interests, but consider all stakeholders in long-term decision making.
Studies have shown that pressure from key stakeholders, such as shareholders and directors, has resulted in behaviours geared to the short-term. Long-term goals can inherently pose challenges as management attempt to balance short-term pressure with long-term perspective. A recent study by McKinsey & Company and FCLTGlobal has identified the key behaviours of management in those companies that outperform others due to their long-term focus, as follows:
1. Investing sufficient capital and talent in large, risky initiatives to achieve a winning position.
Whilst risk-aversion may be common amongst companies, it is through this setting and committing to long-term strategic moves that results in the best long-term value creation. Investments in key long-term strategic objectives lead to higher rates of revenue growth, with the study highlighting that companies which consistently support long-term strategic priorities with capital are “87 percent more likely than their peers to report higher revenue growth”.
2. Constructing a portfolio of strategic initiatives that delivers returns exceeding the cost of capital.
Simply put, value creation can only occur when a company’s returns outweigh its costs. However, not every investment must meet this requirement, rather a well-structured portfolio of strategic objectives that collectively creates more value than the cost of capital can expect to create value in the long-term. Growth itself does not deliver value on its own.
3. Dynamically allocating capital and talent—via divestitures, if need be—to businesses and initiatives that create the most value.
Managing a company for the long-term requires executives to be dynamic, actively entering and exiting businesses. Beyond re-allocating capital, talent and other resources must also be re-allocated in the same breath to ensure any new strategic positions are best positioned for success.
4. Generating value not only for shareholders but also for employees, customers, and other stakeholders.
Generating value for all stakeholders is a key focus for companies with a long-term outlook. Pressures in the short-term to satisfy the interests of shareholders in delivering returns can be difficult to manage with the long-term in mind, so management’s understanding that the interests of shareholders and other stakeholders converge over the long-term is key.
5. Staying the long-term course by resisting the temptation to take actions that boost short-term profits.
When events occur in the short-term that lead to dips in performance, particularly financially, it can be easy for management to react in an attempt to immediately rectify this. It is pivotal for executives to understand that long-term success can be attributed to avoiding three temptations - “1. starving growth investments; 2. cutting costs that could weaken the company’s competitive position; and 3. making ultimately uneconomic choices just to reduce the natural volatility in revenue and earnings”.
The study provides an in-depth understanding of the key components required for long-term success, and highlights the outcomes for companies as a result. Managing for long-term performance is undoubtedly a complex challenge that each company endures, but adopting long-term behaviours such as those mentioned above will lead to long-term value creation for stakeholders.
Studies have shown that pressure from key stakeholders, such as shareholders and directors, has resulted in behaviours geared to the short-term. Long-term goals can inherently pose challenges as management attempt to balance short-term pressure with long-term perspective. A recent study by McKinsey & Company and FCLTGlobal has identified the key behaviours of management in those companies that outperform others due to their long-term focus, as follows:
1. Investing sufficient capital and talent in large, risky initiatives to achieve a winning position.
Whilst risk-aversion may be common amongst companies, it is through this setting and committing to long-term strategic moves that results in the best long-term value creation. Investments in key long-term strategic objectives lead to higher rates of revenue growth, with the study highlighting that companies which consistently support long-term strategic priorities with capital are “87 percent more likely than their peers to report higher revenue growth”.
2. Constructing a portfolio of strategic initiatives that delivers returns exceeding the cost of capital.
Simply put, value creation can only occur when a company’s returns outweigh its costs. However, not every investment must meet this requirement, rather a well-structured portfolio of strategic objectives that collectively creates more value than the cost of capital can expect to create value in the long-term. Growth itself does not deliver value on its own.
3. Dynamically allocating capital and talent—via divestitures, if need be—to businesses and initiatives that create the most value.
Managing a company for the long-term requires executives to be dynamic, actively entering and exiting businesses. Beyond re-allocating capital, talent and other resources must also be re-allocated in the same breath to ensure any new strategic positions are best positioned for success.
4. Generating value not only for shareholders but also for employees, customers, and other stakeholders.
Generating value for all stakeholders is a key focus for companies with a long-term outlook. Pressures in the short-term to satisfy the interests of shareholders in delivering returns can be difficult to manage with the long-term in mind, so management’s understanding that the interests of shareholders and other stakeholders converge over the long-term is key.
5. Staying the long-term course by resisting the temptation to take actions that boost short-term profits.
When events occur in the short-term that lead to dips in performance, particularly financially, it can be easy for management to react in an attempt to immediately rectify this. It is pivotal for executives to understand that long-term success can be attributed to avoiding three temptations - “1. starving growth investments; 2. cutting costs that could weaken the company’s competitive position; and 3. making ultimately uneconomic choices just to reduce the natural volatility in revenue and earnings”.
The study provides an in-depth understanding of the key components required for long-term success, and highlights the outcomes for companies as a result. Managing for long-term performance is undoubtedly a complex challenge that each company endures, but adopting long-term behaviours such as those mentioned above will lead to long-term value creation for stakeholders.
