Friday, July 25, 2014

Stockholders are Not the Only Stakeholders

Recently in Harvard Business Review, it was reported that 78% of CFO's would make a decision that would increase stock value even if it meant hurting the company in the long-term--such as reducing economic value. 55% would cancel a project even though it had a positive Net Present Value. What is going on here?

Sure, these decisions could increase stock price, which means more in their own and their colleagues' pockets when they cash in their shares, options, phantom shares and other stock equivalents. But it also means that it's going to be harder for the stock price to be sustained in the long run. The company's value will decrease in the long-term. The only saving grace is that three-quarters of the their competitors are willing to do the same.

Here's where you can gain competitive advantage. Do what makes sense. As Eli Goldratt says, the goal of a business is to make money now...and in the future. If you hurt the productive capability there won't be any production in the future. There's a lot of pressure, and a lot of momentum, and a habit of making decisions for the shareholders' benefit. Fight it. Be part of the one in five who's willing to make things right for the long term. As I've pointed out before, it's hard to fight habits; only 1 in 10 do. Evaluate your decisions before you make them in light of long-term value (economic value, or EVA). Challenge yourself to decide differently from what you would have decided in the past. (I'm not saying automatically do something different; I'm saying take a fresh look at the options rather than selecting the one you've made in the past.)

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