By Eric Armour and Michael C. Mankins

  

Value is hot again. A year ago, Graham and Dodd, Modigliani and Miller, and even Warren Buffett were decidedly "unhip." Market commentators deemed their management philosophies outmoded or, at the very least, out of step with the fast-paced "new" economy.

That’s all changed.

Today, senior executives are intensely interested in managing their companies to create shareholder value. Rare indeed is the annual report or press release that does not reaffirm management’s commitment to, and focus on, managing for value. In short, the capital markets’ abrupt turn has sparked a renewed emphasis on maximizing shareholder returns.

Management’s rekindled interest in shareholder value is laudable. Still, if there is a danger in value’s resurgence, it is the assumption that managing for value is something companies already know how to do. Indeed, a common theme underlying many companies’ communications with investors these days seems to be: "Everything will be fine if we get back to the basics and do things the way we used to, before the ‘stock market bubble.’" This is a dangerous perspective. It implies that a company can generate strong shareholder performance without significantly changing its strategies, management processes, and organizational capabilities. It would be great if life were that easy, but unfortunately it isn’t.

Generating superior shareholder returns requires great strategies and great execution. And while many companies are beginning to recognize the link between strategy and shareholder value, relatively few have consistently executed wealthcreating strategies over the last 10 to 15 years. Consequently, for the vast majority of companies, generating superior shareholder returns will require more than merely changing what they say to investors. It will demand fundamental changes in what they do—both strategically and organizationally.

So it’s "back to the future" for most companies. "Back" in the sense that companies need to refocus management on traditional economic principles—particularly the principles of value creation. "To the future" in the sense that companies committed to generating superior shareholder returns will need to implement new management processes and build distinctive organizational capabilities.

Holistic Management
Bobby Knight, the now infamous college basketball coach, once stunned a Sports Illustrated reporter by suggesting that the "will to win" is highly overrated. Knight maintained that most athletes "want to win," but the real key to success was the will to prepare to win. He argued that successful teams build their advantage by studying their opponents, mastering their plays, building endurance, and so on. In short, it is preparation, not will, that breeds success.

Similarly, creating shareholder value requires more than the will to succeed. It requires concrete plans and real action. Indeed, a fundamental weakness in much of the recent press about shareholder value is the notion that value creation somehow "just happens"—driven by the quality of investor relations or the market’s overall performance— and is separate from what managers actually do. Put differently, too many executives regard "creating shareholder value" as a corporate rallying cry rather than the goal of serious strategic planning.

Moreover, managing for value goes beyond tracking economic value added (EVA®) and cash flow ROI (CFROI). It is a holistic approach to strategic management and should be the focus of everything a company does. Executives committed to managing for value can’t separate the vision from the plan, the measures from the measured. They see creating shareholder wealth as their number one priority and strive to maximize value each and every day. Thus, at its heart, managing for value is about enabling companies to systematically prepare to win by building the strategies and capabilities necessary to succeed in the capital markets.

A recent study completed at INSEAD entitled "Are You (Really) Managing for Value?" describes managing for value in much the same way. The authors define MFV as "a holistic management approach that encompasses redefined goals, redesigned organizational structures and systems, rejuvenated strategic and operational processes, and even revamped human resources practices." The study found that in addition to sharpening the focus on shareholders and shareholder value, MFV improves the quality and pace of strategic decision-making: "The ultimate result...is a remarkably rejuvenated corporation whose culture has been transformed as behaviors at all levels are altered."

Cadbury Schweppes provides a compelling example of how managing for value can transform a solid, but under-performing, company into a top value creator. Before its launch of MFV in 1997, the British soft drinks and confectionary giant had been notching mediocre earnings growth and share price performance. Between 1989 and 1996, earnings per share grew an average of 6% a year, and total shareholder returns averaged about 10% annually. Meanwhile, the company faced stiff competition from the likes of Coca-Cola, Pepsi, Nestle, and Mars as it struggled to remake itself from a domestic business into a global player.

Just months after John Sunderland took over as Cadbury’s chief executive, he and his executive management team rolled out a far-reaching change program with ambitious goals for the company. Sunderland pledged that Cadbury would double total shareholder returns within five years (later revised to four years) and achieve double-digit EPS growth while generating more than £150 million of free cash flow annually.