Delivering Value
Over recent years, South African businesses have focussed on achieving their “Triple Bottom Line” mandates to such extend, that the Returns for Shareholders Bottom Line, sank to the bottom of the triptych. And this rings the death knell for social responsibility and environmental impact too. I believe that the executive responsibility towards shareholders needs urgent refocus. Responsibility to employees, customers, the community and to sound environmental practises only becomes viable when solid returns are achieved. Returns on Shareholder interest is the gate towards the other desired outcomes.
Even before the ”Covid Scamdemic” fiasco, South African businesses have struggled to deliver for shareholders. Eskom’s inability to be a reliable supplier of electricity over the last 15 years and longer, played a major part. Eskom’s woes are symptomatic of larger and deeper and much wider problems caused by Government Policies that is not geared (sic) towards economic growth in an environment desperate for growth. But this note is not intended as a gripe over spilled milk. Our cheese has been moved. Let’s play the ball as it lies. There are need to improve yields for shareholders. Given that South African businesses have to overcome a circa 5% investment hurdle just to overcome the political risk (and sadly few businesses have yielded better annual returns than this mark over the past decade or so) before “normal” return on investment comes into play, I believe that executives must target the 10-15% levels in their strategic plans, to compensate their shareholders and to position for re-investment. The question is how?
The first step is to stop skirting around the issues. Don’t make excuses. Delivering healthy returns requires focus. It requires honesty too. It also requires a genuine desire to deliver, not mere lip-service. Focus gets diluted by falling down rabbit holes. Focus on delivering share holder value must begin with financial returns. Only after solid financial results are banked, the secondary bottom lines become important. If these “rabbit holes” come before shareholder returns, your cart is in front of your horses. (I do not diminish the importance of social- and environmental bottom lines, but put forth that these can only follow sustainably after the financial returns are achieved. Returns to shareholders are paramount.)
During my career I was often amazed by business people who focussed on turn-over growth as the sole source of financial salvation. Don’t misunderstand me, turn-over growth is important. But it is even more important to achieve your desired growth with product(s) groups that will contribute lower down your income statement. Failure to do so makes you a busy fool, chasing your tail in ever decreasing circles. You have to understand where (which products) your financial contribution originates from. You also need to understand your market, your customers’ relative competitiveness within their markets, as well as the risks and outlook for those customers’ markets. Your strategic plan must focus on turn-over growth from products that contribute to your income statement’s bottom line, and to attain it from the lower customer-risk (potential) customers in each market sector that you trade into, and within the market sectors which offers greater stability and/or growth potential within the global market place. Acknowledge that your shorter-term “make this year’s budget” plan will require faster but less strategic work and results.
I have worked in diverse businesses and markets. In each environment there are “pet” products, the most favoured products by the manufacturer. All too often, these favoured products benefit from lean cost allocations in order to prop up its performance. Yielding to this “corporate political” temptation creates a fatally misleading impression of sound performance. It comes in the form of marginal costing, i.e. not allocating existing capex costs to new and/or pet products, or just a relative light allocation. In my experience, these cost allocations were sometimes made by previous management teams, who have since moved on. With them, the “memory” of such skewed cost allocations are then lost. Later teams may base business decisions on the misinformation that was created and experience difficulty in understanding why changes in their product strategy fails to deliver the hoped-for outcomes. Delivering shareholder value must start with an honest, deep-cut review of product cost, i.e. the Bill of Materials (BOM) cost. A deep dive into your factory over- and under-recoveries is the place to start, before you investigate relative product gross-margin performance. You have to have the “ugly” truth on the table, even if your intension is pivoting around non-performing products. Knowing where you stand, i.e. making the correct diagnosis is the first step in healing lacklustre business performance.
A comparison of relative product gross-margin (GM) performance flows from your BOM review. A myriad of possibilities must be understood. Historic margins do not indicate what the market or market sector will bear. Neither does competitive prices from other players. Once you understand the customer value provided by your products (inclusive of the product service package around it), its relative cost percentage in the final assembly and its alignment or not to your customers’ business strategy, then price management and negotiation skills will determine how you will succeed or fail to deliver value to your shareholders. Every additional buck made at GM level, benefit the shareholders as it should not be affected by items lower on your income statement. In other words, it is not only the GM% that is important, but the actual amount of money delivered on the GM line is vital. Additional GM has a strong accelerator-effect on shareholder returns.
In order to deliver shareholder value, customer related risk must be managed. You should leave the high credit-risk customers to your competitors, let them crash and burn and bear high churn. Ditto for low margin customers (very often lowest direct cost buyers) and slow payers. Your business strategy should include developing business into a more stable and growing customer base (e.g. having a lower position on their market’s supplier cost-curve, or other bankable differentiator). Call for firm demand forecasts where-ever possible as it aids your cash flow plan greatly. Exports rather than local sales will reduce local currency risk exposure, but introduce different business risks, such as shipping terms which must be understood. Either way, the old mantra that cash is king remains true. Avoid bad payers like the plague, be tenacious in negotiating prompt terms and police cash flow on a regular basis. Sound planning creates cash on hand which makes dividend payments easy. Shareholders welcome it.
Shareholders do seek and justifiable so, acceptable returns. Shareholders also have fluidity in their risk appetite. Your ability to deliver on the financial bottom line will create liquidity of their equity. This creates value that will be quantified in either the share price of their interest, or in a lower risk assessment when new investment capital is sought. Either way, shareholder return expectations are inversely proportional to their perception of their risk exposure. Sadly, the South African socio-political climate adds to perceived business risk and therefore it is more important than ever to deliver shareholder value for your business’ long-term viability. A well-grounded focus on the shareholders’ interest will yield the resources to deliver on the other bottom-lines.
Barnie