| Create Mutually Beneficial Solutions for Faster Progress - QUANTIFIED STAKEHOLDER INTEREST BALANCING FOR BETTER BUSINESS RESULTS- |
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The Problem and Rewards of Staying Well Directed and Dry
Many CEOs feel like they are holding a water balloon while riding a bucking bronco when they make a decision. Push in one direction and the bag expands in several unwanted places. Push too hard and the bag bursts, leaving a messy hand. Ignore the bucking bronco, and you find yourself on the ground with the bronco's hooves stomping at you.
Like the rodeo, stay on long enough, with enough control, and you can win the prize, and dismount in safety. In this case, the prize from a better management process should be added economic benefits to the company equal to your current equity market capitalization within two years.
Let's look at a typical business decision. When a CEO decides to reduce jobs, for example, the consequences extend in many directions. For employees, many will be concerned about how this will affect them. Work output and morale may drop for a while. Some may even lose their jobs. Severe stress will fall on many of those employees and their families, who may begin to talk about the company in ways that hurt its reputation and customer confidence. For customers, they may lose a familiar face or voice that often provided helpful service and may even feel the need to look around for a new supplier. They will certainly be worried about the health of the company in the future. Suppliers may tremble, wondering when the company will ask them to reduce prices to share the pain, and step up their search for new customers. The community that received taxes, donations and volunteer work from the people holding these jobs may have to rebudget and reduce services. The local newspapers will be filled with hostile articles, in some cases quoting disgruntled employees, tarnishing the reputation of the company for reliability. Shareholders may be pleased that costs will be lower, but may also still be concerned about the source of the problems that led to the job reduction. In some cases, the stock price will actually fall because of widespread investor concerns about unresolved problems.
Why did the CEO decide to reduce jobs? It was to cut costs in order to serve customers and shareholders better, and provide more security to the remaining employees. In fact, those objectives may not be served. Mitchell and Company's pioneering research on job reductions has shown that in the majority of cases, stock price and market share drop three years later for the reasons described in the preceding paragraph. Despite having been published in dozens of magazine articles and books in the last few years, we see examples of this phenomenon frequently being repeated.
Why can there be such large, unintended consequences from thoughtful decisions by highly intelligent and capable leaders? Perhaps the easiest explanation I can offer you is a physical one of balance. If an earthquake were occurring, would it be easier to stand on one foot . . . or two? On two feet . . . or to be on hands and knees? To be on hands and knees . . . or to lie flat? To lie flat . . . or to lie flat on a specially-prepared foundation for earthquakes? As you can see from this analogy, in times of change you are better off with as much contact with the ground, as close to the ground, and with as safe a type of ground and location as possible. Yet most people go to the top of the highest building to get a good overall view during the earthquake, and find themselves in a precarious perch.
In the field of executive decision-making, this principle also applies. If a company is closer to more of its stakeholders (who I will describe here and for the rest of this paper as customers, employees, shareholders, suppliers and the communities the company serves), new solutions will arise that provide better results for everyone. Being closer means more frequent contact, listening more closely, and assessing the joint effects of actions and different sequences of actions carefully and accurately through accurate quantification (as opposed to the overly rosy dreams that are characterized as "conservative estimates" in the plans behind many decisions).
Many CEOs will tell you that this is what they try to do, but that they get too little help from their organizations . . . or the stakeholders themselves. Every stakeholder sees his or her own little piece of the jigsaw puzzle, but no one looks at the whole puzzle as one picture because it has not yet been assembled and is not printed on the outside of the box. This management process is designed to solve that problem for you.
Benefits for You and Your Organization
Peter Drucker has shared with us that this problem of achieving the best balance among stakeholders was the number one CEO problem over forty years ago. He also pointed out that there have been no new developments in the field since then to improve this balancing to get better results. Recent surveys by us, show creating the "juste milieu" (the French phrase for the right balance) as continuing to top the list of concerns for a majority of CEOs today.
Wouldn't we all be more proud of ourselves if we knew that the most people benefited by the largest margin from our decisions, not just those stakeholders who can push the hardest on us at the current time? Also, imagine how much more could be accomplished if they saw how cooperation helped everyone. In a rowing race, the crew with the best coordination of strokes and cooperation usually beats the crews with stronger rowers who pull their oars in disharmony.
You will find that tough trade-off decisions will be more readily and favorably received. Since the trade-offs have been made explicit, you can communicate more accurately why the chosen solution is the best that can be accomplished for everyone. You will also reduce the likelihood of unwittingly stepping on some stakeholder toes.
You will sleep better at night. Although no decision is without drawbacks, you will have the peace of mind of knowing that you have gone as far as anyone could to find a great solution for everyone.
You and your company will have more credibility because of the professionalism and caring that you show in your decisions. Great leaders act this way -- often instinctively. Having a process gives everyone the confidence that you and the company can be trusted to routinely do the right thing. That helps communicate the strength of the direction you are setting.
Because you will improve the climate with stakeholders, they will be more cooperative with you and the company. Their good will should bring tangible business benefits.
You will take less risk in your career. The nature of such an inquiry is to open up the process and make people feel that you want their involvement. You will be seen as their best advocate, and will be very valuable to all of the stakeholders, who will have a vested interest in keeping you in place.
Why do I say that this process offers such large potential financial benefits? Understanding how decisions affect stock price and testing major decisions for this factor would normally add over $600 million in market capitalization for a $3 billion market capitalization company within two years. Compared to the cost of developing this capability, the benefits would exceed the costs by several hundred times. Because this new capability adds benefits for stakeholder groups in addition to shareholders, we expect that benefits will exceed that found in the stock price improvement area by a factor of at least five. That means that a company should expect to add economic value for the company equal to its total current equity market capitalization from this process!
Becoming a Balance Master for Stakeholders Now
In our annual research published in Chief Executive Magazine on the lessons from CEOs whose stocks have grown the fastest, the importance of balance becomes clear. Those who are near the top, year-in and year-out, are typically those whose sources of growth are the most balanced. Revenues, market share, profit margins, asset turnover, and other financial ratios are all moving forward at a similar rate compared to other top performers. The "flash in the pan" who appears for one year and is never heard of again typically makes great headway in one or two performance areas, while the others stay steady or decline.
Unlike other management processes, this one can be applied to limited classes of decisions and does not need to become something that is applied in a wide variety of decision situations. Evaluations of overall strategies, strategy changes, and strategy implementation plans (especially involving mergers and divestitures) are particularly high payoff areas.
Major decisions that lend themselves to having different impacts on various stakeholders include:
- the scope and nature of acquisition activity
- divestitures
- changes in the mix of businesses
- accessing much more low-cost capital
- focus on new product and service development
- geographical expansion focus and speed
- changes in the ways that products are marketed and distributed
- new methods of compensation
- and cost-cutting.
In addition, a variety of decision-making activities will benefit from better measurements and processes:
- strategy development
- policy setting
- budgeting
- business development
- capital spending
- competitive performance improvements
- individual performance reviews.
During the course of our practice, one of the most important insights that we have learned is that if you measure something visibly (even if compensation is not changed), human behavior will change because people will seek to improve their performance on that measurement. In addition, with better information, decision-making will improve. For example, an archer uses the bulls eye to provide a focus for aim and to evaluate performance, in order to improve future shots. Naturally, bringing compensation into alignment with the measurements is a powerful additional leverage point after the new measurements have proven themselves.
If you are not a CEO, you may be thinking that this subject is of no concern to you. Chances are that no one in your company is doing Quantified Stakeholder Interest Balancing (Q-SIB) now, and the opportunity will be lost to do so unless you help organize some effort to learn more.
Many people know our work only through stock-price improvement (one of the areas encompassed by this new management process), financial management, or corporate or business-line strategy - depending on what organization they are involved with or what assignments we have completed for them. They are sometimes surprised to learn that we have developed parallel management technologies (working with other executives who are expert in these areas and surveying the best practitioners in the world) in many different areas. All of these technologies have the same overall framework.
How to Get Started
I want to help you pursue this great opportunity personally, as your lead consultant on a project to focus your organization on getting that good contact you need to stay centered and balanced during times of change and turbulence so that you will enjoy all these great benefits.
We should begin by discussing this over the telephone, and developing a joint plan of how you and your company should evaluate and design a way to create this wonderful balance to propel you forward to much greater success. To help keep these materials shorter, I have not included the details of the process, and I would be happy to provide those details to you whenever you wish.
You can speed your progress call Mitchell and Company at (781) 466-9500 just as soon as you finish reading this. I look forward to hearing from you. If you want to see how this can be applied in practice, please continue to read the example below. Otherwise, you can stop reading now.
Building a Core Business from Cast Offs -- A Case History
The first time I visited one of our clients, they asked me what I thought the common theme was for all of their businesses. They wanted help in devising a theme for that year's annual report. Abstractions like "business equipment and services" were the best that I could do . . . which were of no real help to them. The lesson was that with no pattern to what businesses they pursued, everyone was confused about the company, from the inside out.
They then began to ask, "What business could we be in?" The answers to that were quite a bit more interesting. Two or three parts of the company offered the opportunity for profitable growth potential in industries that most people liked. Unfortunately, the company's largest business area was not one of those.
Over a period of three years, the company looked at what could be done with these two or three promising, but smaller parts--including more products and acquiring related businesses. Progress was slow.
Suddenly, the financial press reported that the largest company in one of the promising areas was to be divested by its corporate parent. Our client requested permission to bid, and was turned down cold. Puzzled and a little hurt by the rebuff, they struggled unsuccessfully to learn why.
Finally, I was dispatched to meet with the treasurer of the selling company (another client) to try to learn what the problem was. In confidence, he told me that he did not believe that our first client had the financial resources to be able to afford the purchase, could not be trusted not to fire the employees willy nilly, and uphold the good name of the franchise that the business represented.
Since I had been told this in confidence, the best I could do was to report to the CEO that he should request a meeting with the CEO of the selling company and ask what the potential buyer's company could do to become acceptable to the seller. Several meetings ensued in which the issues gradually emerged, and the buying CEO eventually resolved them. The purchase was completed for cash, along with some significant promises about continuing employment and maintaining the reputation of the business.
The buying CEO then asked me if I would help facilitate the merger of the two businesses. The business that the company owned before had a small market share while the newly, acquired business was the overwhelming market leader. He was concerned that his pledges to the selling CEO would not be met if the usual syndrome of "keep the purchasers, fire the purchased" occurred. The stakeholder needs of the seller were only met if the pledges were kept.
What I learned was fascinating, astonishing, and shocking in many ways. Each business had contempt for the business operations of the other, and a total misunderstanding of each other. The smaller business had been taking away many of the larger business's largest customers with an aggressive marketing program for a year, and the larger business was unaware that this had been taking place. The larger business also had five blockbuster new products in advanced development that the smaller business had no hint of (the smaller business thought the larger one had no product development expertise). The smaller business had made a substantial breakthrough in new software-based services, and the larger business had not even considered the emerging market opportunity.
In fact, the two businesses and staffs were almost perfect complements to each other in age and experience. The smaller business's top executives were all within 1 to 3 years of retiring, except for the fellow who was heading up the new software-based services. Having met everyone, I visited the buying CEO and told him that he should combine the two organizations by keeping everyone at the very top . . . but have an early retirement plan for the people in his top management and a clear succession plan for the younger people in the larger business to take over as the older people in the smaller business retired, tied to an incentive program to encourage timely and effective integration of the two businesses.
The CEO of the smaller business became the chairman, and the CEO of the larger business became the CEO of the combined operations. These two executives along with the pairs of those where one would succeed the other them then worked together to develop the plans to put the two businesses together. Each had a stake in the outcome through bonuses tied to how rapidly and well this occurred, so that there was a payoff from the temporary duplication in top management. In joint meetings with all employees, the paired managers shared their plans openly and honestly. Morale soared. That met the stakeholder needs of the employees, and fulfilled the pledges to the seller.
Customers were made very nervous by the merger. Would the result be higher prices and reduced services from two very important suppliers? These customers were on fixed budgets that they could not influence, and the effect on their operations could have been very bad. Some contacted the Government to share their concerns. Extensive meetings were held with customers, supplemented with thorough surveys, to find out what concerns customers had. Even before the merger was complete, pledges were made that satisfied the legitimate customer concerns. That met the stakeholder needs of the customers.
Suppliers depended on the income they received from sales of these services, many of which triggered royalty payments. Would the new, combined companies have a different marketing plan that would affect the suppliers' royalty streams? This concern was learned through telephone calls from the suppliers. The two businesses saw no reason to change direction in successful operations they had been operating for years, and shared this with the suppliers. That met the stakeholder needs of the suppliers.
The two businesses had their operations concentrated in three small towns. Loss of employment in any of these would have had a major, local effect. On the other hand, overheads needed to be cut. One headquarters was closed, but that facility was converted into product development activities so that overall employment level was maintained by adding new people, while the surviving members of the headquarters staff moved to the new headquarters location. The site was, in fact, an excellent one for product development, and great successes later came from that facility. That met the stakeholder needs of the communities.
A cornerstone of the new company was to articulate a plan to implement all of the new directions that both businesses had been pursuing. By communicating openly with the parent company management, the available expense and investment funds for these activities soared. Progress accelerated, and within two years earnings growth had more than doubled from the prior five years for the combined companies, and stayed on that path for the last decade. Now the combined companies comprise about two-thirds of the parent company with a total market capitalization of about $2.5 billion. The purchase price of the larger business was about $80 million. That result has met the stakeholder needs of the shareholders.
Without having rigorously met the needs of these stakeholders, I feel that the two businesses could easily have been less successful. For example, the merger could have been stopped by either the seller or the customers. In fact, the former almost occurred. If the key product development people had been lost through insensitive treatment, a lot of the later growth may not have occurred or occurred as soon. If the senior management had not supported the new products initiatives with increased funding and interest, much of the shareholder benefit would have been lost.
I recently visited the parent company again, and was struck that the balance had been maintained very well over the past ten years. What interested me was that this result had occurred despite a complete turnover of key executives in both the parent company and the division that comprises these two combined businesses.
You may be troubled by this example, because it appears that no one was hurt. That is not true. Many people suffered large amounts of anxiety during the course of the acquisition and the planning for consolidation. Dozens of key people moved to a new area. Some people retired a little early who had not originally planned to do so. After the fact, however, almost everyone was pleased with how things had gone. There had been some short-term pain, but that was more than offset by the long-term benefits even for those who bore the brunt of the pain. As you can imagine, the improved future for almost everyone was invisible to each person before the process began, or there would not have been so much anxiety and false expectations in the beginning.
As you can see from this example, a problem here for creating a Quantified Stakeholder Interest Balance (Q-SIB) is that unless an executive is pursuing the identical situation, the process for balancing interests to get better results in another circumstance is not clear. Q-SIB is designed to create a universal process for a wide variety of circumstances.
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