In order to effectively build value over time, management alignment is critical. The process of building value is a continuous loop that can be encapsulated within three broad steps:
- Taking stock of the value-creating situation within the company and identifying opportunities for improvement
- Acting on those opportunities
- Instilling a value-creation philosophy in the company
At ContXt® Corporation, management alignment actitivities center on how to assess, create, and communicate value throughout the organization. This involves focusing planning and business performance reviews around value creation, developing value-oriented targets and performance measurement, restructuring the compensation system to foster an emphasis on creating shareholder value, and evaluating strategic investment decisions explicitly in terms of impact on value.
A lack of management alignment on value creation is a key link in the chain leading to economic crisis. Value needs to be understood clearly by CEO’s, business managers, and financial managers alike. Too often, valuation has been left to the experts. It has been viewed as a specialized discipline, rather than as an important tool for running the business better. The natural inclination of an enterprise is to reinvest its cash, rather than give it back to shareholders. Such an approach can result in bad investments that reduce shareholder value. Poor investments can take the following forms: Money is invested in businesses that the company knows, but are not attractive, or in businesses it does not know and is unlikely to succeed in. If management alignment activities focus on shareholder value maximization, spending on unattractive investments is much more likely to be curtailed than if managers are following some other objective, such as employment preservation. Managers have the right to manage the corporation as long as its market value cannot be significantly enhanced by an alternate group of managers with an alternate strategy.
Two centuries ago, Adam Smith postulated that the most productive and innovative companies would create the highest returns to shareholders and attract better workers, who would be more productive and increase returns further. To that end, management’s incentives should be more closely aligned with the interests of shareholders. Management alignment involves understanding what operating drivers have the greatest prospects for enhancing value, effectivley communicating value building initiatives across the organization, then holding each other accountable for execution.