Shareholder value creation!

Some of the sexy phrases in the BFSI language which you will encounter are “Maximising Shareholder Value”. Evey Chairman has espoused this at some stage of his life. Let us see what it was supposed to mean and how a coetrie of top 100 odd employees in each company has beautifully hijacked this phrase.

I am all for creating shareholder value – but in the 1980s we thought a company should do well, have good customers, have decent margins, treat employees well, have vendors, dealers, etc. and SHAREHOLDER VALUE was incidental. Today I am realizing that shareholder value has ALMOST nothing to do with all this! This is NOT A TIRADE against capitalism (THE UNKNOWN IDEAL!!), BUT a note to tell you the LIMITATIONS of ‘shareholder value creation’.

Let us start by accepting that Markets do not create shareholder value – it only reflects it. A company’s valuation is created by its management team by hiring good people, making good products, walking the world in selling it, creating more value for the customer….and at the end of the journey creating profits. Profits means EPS, and sustainablility means PE! The market recognises this and keeps increasing the PE. Presto, value got created. Companies do many things in the course of creating value, but at the end of the day a firm is in the business of generating a profit. (ok, ok, let the brickbats come). So while there are many things a company can do to create value the creation of profits and a sustainable underlying business is the most important part of creating shareholder value. Companies maximize profits by selling goods and services to customers, AT A FAIR PRICE.  If you are building a company that provides valuable goods and services then you will earn high profits. In my mind “maximizing shareholder value” is ONLY, in the long-term sense of business viability, fair pricing, fair compensation to stakeholders, ….are equivalent to maximizing value to customers.

Unfortunately, shareholder value, treating the customer well, etc. do not seem to be moving hand in hand these days. Let me enumerate the problems that I see:

  1. ESOP is doled out freely: How do you expect employees to have respect for ‘shares’ if they are given HUGE esops on a regular basis? Currently I would know a few insurance company employees who have shares in lakhs (numbers, not value).
  2. Employee / Chairman short termism: there is short term ‘ism’ among shareholders, Chairman, Board, Regulator…so the so called long term wealth creation vehicle seems to be lost or going adrift somewhere.
  3. Current management wants the price to go up fast so that they can sell the share and make money FAST.
  4. Current management uses many tools like big dividends, bonus, creating a trust to ‘park’ their esops, buy back – almost anything which is to suit the ‘management’ rather than all the shareholders in general.
  5. Esop, buyback, big dividends – all decisions are taken by the current management and the current board, there is really nobody rooting for the small shareholder who is not participating in the loot.
  6. Actual value of a company is created in the market – sales, market share, happy customers, repeat purchases, etc. The share market is just the scorecard. HOWEVER, the score card just measures the score – it does not measure how the runs were made! So if there is a catch dropped or a streaky four between the slips ONLY a person watching the match will know. Currently Insurance companies are not creating wealth or even satisfaction for their customers, however their shareholders are seeing wealth coming out of their eyes, nose and ears!
  7. Not sure how much of the market cap of the BFSI – and I am broadly including BSE, CDSL, etc. in this category – is really sustainable. Your guess is as good as mine.

At the very basic maximizing shareholder value is consistent with providing value to customers. It is Ayn Rand’s Unknown Ideal. It is a generally useful idea it does not mean that all aspects of it are beneficial to all parts of the society. Maximizing shareholder value is a highly useful but RECENTLY imperfect approach to managing a company.

Employees of insurance companies (including the regulator) know how much of mis-selling and client loot is happening. Sucheta Dalal can actually deploy a 30 person team just for checking this alone. However forget activism, many policy holders do not even KNOW that they have been had. Such people are NOT seeking justice – they do not know about the injustice.

However, the shareholders (including the employees and ex employees) are laughing all their way to the bank. I am sure I will be able to find 100,000 unhappy policy holders and 100,000 happy shareholders in the same industry.

Can they co-exist, that is my question.

 

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