Improve performance, improve management
By Christopher Ram
November 21, 1999
Throughout the years in capitalistic societies many popular accounting equations such as return on investment, return on equity or assets and earnings per share have been used to measure business performance. Increasingly however management success has become widely recognised as the extent to which shareholder value has been enhanced. In looking at the merger and acquisition boom in international corporate circles it was evident that many acquisitions were driven by the inattention to the importance of increasing shareholder value by the managements of companies targeted.
At one level there was the view that re-investing profits was an unquestionable virtue. Very often it was felt that excess cash flows were not being reinvested for the maximum benefit of shareholders or assets were not being put to their best use. When some corporate decisions are examined closely, sometimes it would have made more sense for many companies to utilize excess cash flow for larger dividend payments or even to sell assets and increase distributions to shareholders.
This perceived and in fact actual mismanagement led to the birth of the so-called corporate raider. These often-vilified individuals surveyed the field for undervalued companies and raised huge amounts of capital, sometimes by means of junk bonds, to finance their acquisition. They would move in, replace incumbent management and adopt strategies that were more concerned with delivering value to shareholders.
Often this meant selling off under-performing assets or divisions or breaking up the company and keeping those pieces that would produce the greatest return to shareholders. These tactics produced astronomical profits as well as a bad reputation for the corporate raiders, sometimes referred to as asset strippers. However, despite all the furor that they created their actions certainly helped refocus managements on their true raison d' tre. This article certainly does not seek to paint these people as saviours for they often sacrificed the long-term interest of the entity to short term gains.
Managements like most individuals often act in their own interest and this sometimes does not coincide with that of the shareholders of their companies. If one looks at the performance of many companies in Guyana one cannot help but notice that this incongruence of interests is even more pronounced. This has been fostered by the complacency in many boardrooms that has neither provided the direction nor demanded the level of performance that would bring about desired results.
It is no surprise therefore that the advent of competition (unfortunately usually in the form of a foreign entity) usually evokes an outcry for protection by the Government. It is time for companies in Guyana to wake up because with the opening of the trade and economic borders, as the saying goes "you ain't seen nothing yet." Our new President has intimated that he proposes many sweeping reforms to attract investment and if Guyanese businesses expect to remain on the field, they must start getting their collective act together or they will be left eating dust.
Increasingly there is talk of a formal capital market but while there is a significant number of Guyanese companies, which could benefit from going to the equities market, few of them would dare take the plunge. Some could not stand the glare of audited and published financial statements, while others would not be able to deliver the consistent results required by an efficient equity market because of the quality of their management. This is not to say that there are no well- run well managed companies in Guyana that could compete in any arena. Business Page recently identified a number of these and acknowledges that there must be many more.
It is however a sad commentary on some of our "public companies" whose Boards of Directors and managements run them like fiefdoms and appear answerable to no one. Often looking at the financial results and the returns to their shareholders one wonders at whether these companies are not better off their assets and returning the capital to their shareholders. They certainly could do no worse investing the money in time deposit accounts at the local banks.
In our imperfect world where the supposed master (shareholder) has little control over the action of the servant (management) in our public companies, the best interest of the shareholder is not always served. The main reason is that in many instances there are few if any consequences for the management that does little to add to its shareholders' value. More and more in the advanced economies, management compensation and shareholder returns are being linked and local companies need to consider moves in this direction.
Lead, not manage change
In addition, strategic planning must become a principal tool in formulating a corporate direction that would allow managements to lead change rather than merely to react to it. The nature of business requires that results be measured in the form of financial performance as reflected in the financial statements. Too often however plans are believed to be comprised solely of financial projections, which on closer examination, contain ill thought out and often unrealistic assumptions. While financial statements are essential and useful they do not always provide the answers that are necessary for sound corporate governance.
The strategic plan must be developed at each level of an organization with its overriding goal being the maximizing of shareholder value. It should address the question not only of whether the direction being charted will add value for the company's shareholders but how much value will be added and in what time frame. It should also highlight which activities and business segments or units add value and which do not as well as the steps being taken to ensure that the corporate focus is on high value activity.
Before the plan is adopted, it must be subjected to the most rigorous examination for sensitivity, threats, financial structure and resource availability and be critically reviewed by some independent persons.
Our businesses must now invest in the sophisticated mechanisms and strategies that would ensure that they not only compete but stay in the forefront of their industries. Whether we like it or not we are now swimming in the same seas as the big fishes (and some sharks as well). We cannot therefore continue to operate with methods that may have proved successful in an era long past. There is simply no room for nostalgia in business.
Too many successful entrepreneurs find it difficult to take their business from the fledgling enterprise to the next level: corporate powerhouse. The main reason is that they stubbornly refuse to recognise that an entrepreneur is not necessarily a manager and often needs to enlist a team of high calibre professionals to develop and execute a strategic course for the business.
Many view staff training and the utilization of professional services as unnecessary cost rather than the investment that they really are and refuse to allocate funds for these purposes. Unfortunately the recognition of the fallacy of this belief does not hit home until the business is already in deep trouble from which it is unlikely to emerge.
A © page from: Guyana: Land of Six Peoples