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Managing value and performance

Maximizing the value of companies means attending not only to their short-termperformance but also to their long-term health.

Richard Dobbs

http://www.mc insey!uarterly.com/article"page.aspx#ar$%&'&()*$&()+$,

2005 Special Edition: Value and performance

hat should a company s ob ective be# 0imply to maximize returns for shareholders by

increasing the intrinsic value of a business1 or should the company ac nowledge the interests

of other sta eholders2employees1 customers1 society2in its decision ma ing# 3ver the past

few years1 the argument in favor of maximizing returns has ta en more than a few blows

because of the excesses of the dot-com boom1 the stoc mar et s obsession with short-term

earnings1 and the executive greed and scandals carried out in the name of maximizing

shareholder value.

4or Mc5insey s corporate-finance practitioners1 the tumultuous recent past has reinforced

two fundamental beliefs. 6he first is that the business of business is precisely to maximize its

shareholder value by increasing its intrinsic value. 6he second is that maximizing value

involves managing both performance in the short term and the company s long-term health.

6he fact is that the more shareholder value a company creates in an effectively regulated

mar et1 the better the company serves all its sta eholders. Research by Mc5insey s

corporate-performance center has demonstrated the wider sta eholder benefits of managing

for long-term-value creation: the companies that created the most shareholder value over

the past %& years also created the most employment and invested the most in R(D. 7t sworth remembering1 too1 that many of a company s ultimate shareholders are ordinary

people whose pensions depend on the value created by the businesses in which their

retirement savings are invested.

Delivering shareholder value calls for managing not only the short-term performance of a

company but also its long-term health2its ability to sustain performance over time.

8orporate health involves many components: a robust strategy9 well-maintained assets9

innovative products and services9 a good reputation with customers1 regulators1

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governments1 and other sta eholders9 and the ability to attract1 retain1 and develop high-

performing employees.

hen most companies thin about long-term performance1 they thin about growth1 and as

the world economy recovers1 growth is top of mind for many 8 3s. ;ut a healthy company

isn t necessarily one with high-growth plans. 7ndeed1 many companies have destroyed value

through their growth ambitions1 particularly when they overpaid for ac!uisitions. <rowth may

well be part of sustaining performance1 but the other ey component is a decent return on

capital invested. 7n industries facing low or declining growth1 managing health may be more

about sustaining returns.

6his special edition of the Quarterly is devoted to a better understanding of maximizing

shareholder value by managing performance and health. 7t draws on the soon-to-be-

published fourth edition of Valuation 1 by 6im 5oller1 Marc <oedhart1 and David essels2our

textboo on measuring and managing for value. ith more than +&=1=== copies in

circulation1 Valuation is an essential tool to parse the intricacies of finance and value

creation.

>rticles adapted from the new edition explore issues crucial to understanding value. ? Do

fundamentals2or emotions2drive the stoc mar et# ? investigates the theories of behavioralfinance1 which holds that mar ets are irrational. 6he authors show that mar ets actually

focus on intrinsic value.

?Don t expect too much of your share price ? explores effective investor relations1 which is not

about maintaining the highest possible share price but rather about lining up share prices

with a company s intrinsic value. ? Measuring long-term performance ? loo s at ways for

managers1 investors1 boards1 and analysts to assess how well companies are doing.

8olleagues from around Mc5insey have contributed insights on important issues related to

creating value. ? Mapping the global capital mar ets ? presents research from the Mc5insey

<lobal 7nstitute on the underlying macroeconomic trends that are driving and will drive

mar ets. >nd ? 6he view from the boardroom 1? with the findings of Mc5insey s survey of more

than %1=== directors1 shows that boards are ready to move beyond the compliance issues

spurred by corporate scandals and to ta e a greater role in directing the strategy and value

creation of the companies they govern. 6hose who understand the fundamentals will be in

the best position to continue creating the value that eeps companies1 and societies1 healthy.

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