Companies tend to base their success, or lack thereof, on whether and to what extent they have enriched their shareholders. Generating handsome returns is obviously a primary goal, but short term earnings do not necessarily entail long term growth and survival. Although it will never be possible to ignore the importance of earnings for shareholders, it is not necessary to focus solely on this measure to the exclusion of other important metrics, particularly overall value. After all, it is market value that will inevitably impact a company’s long term financial success or failings. Here are three important ways to build shareholder value:
Prioritize Value Over Earnings
A company can earn quite a bit for its shareholders in a relatively short amount of time, but truly building and maintaining value will often take much longer. Unfortunately, the pressure to deliver quickly, a rapidly changing economy and market conditions, and general investor impatience often lead to companies making decisions for the sake of good earnings in the immediate future. Although reporting strong earnings in the short run will be well-received, simply doing this over and over is usually done at the expense of long term value.
Company leaders understandably feel forced to make business decisions based on how it is going to impact the reported earnings, and given that people may sell off their interests at the drop of a hat, there is legitimate pressure to ensure positive news at all times. But, the decision-making process must take into consideration the ways in which the business can increase sales and future cash flows, as this will secure the business’s value and eventually lead to strong earnings year over year.
It may not seem feasible to forego higher earnings for the sake of long term value, but the success of this really comes down to messaging. Shareholders have to be engaged and strategic decisions that are communicated in the right way and at the right time can go a long way in quelling fears over less than stellar earnings, especially if it is clear that what is being done will lead to better value and thus healthy profits in the future.
Look Long Term
This clearly ties into the first point about shifting the focus more on value rather than merely obsessing over earnings, but there is more to long term thinking than just growing general market value. A long term management approach must incorporate sound investment decisions, strong marketing principles, building and maintaining a loyal customer base, expanding market opportunities, perfecting business operations, and so forth.
Many of these key business activities will take a backseat when there is a fixation on maximizing earnings in the short run, and failing to constantly reinvest in the business will eventually prove disastrous. Granted, some businesses may just be looking to strike big early and then will sell high, but most success stories are grounded in hard work that takes place over the long haul.
Incentivize
It is ultimately the people running the business that will determine whether a company creates and sustains real value. As a result, they must be both incentivized and rewarded for their dedication and hard work to growing the business. From the C-level executives to the middle managers to the employees working on the frontlines, anyone and everyone who is committed to making the business bigger and better must be encouraged to do more and rewarded for their efforts when it is clear that they are making valuable contributions.
