What is Value?

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Crypto entrepreneur Sina Estavi paid about $2.9 millions in March 2021 for the NFT of Twitter’s Founder and CEO Jack Dorsey's first tweet. At the time he made the purchase, he famously stated that people would realize its value be something like Mona Lisa painting. Fast forward a year later, he listed the NFT for sale at a price of $48 million, but the highest bid he received was about $6,856. What is the value of this NFT? $6,856? $2.8M? $48M?

The term value is one of the most overused and but probably least defined terms in the business world. On the one hand, companies often have value statement which sometimes go along with vision statement. On the other hand, decision making in business world often focuses on value creation for shareholders which is most often measured by numbers such as NPV, ROI. The connection between the two value frameworks are not always obvious to many employees.?When I ask folks to explain in a few words about value of their work, more often than not they stumble with an answer with clarity about the linkage and even the definition of value. Moreover, it is not always clear how leadership value and personal value system fit in the conversation. The increasing demand on corporations for ESG is adding another layer of consideration.

When the word value is used in business context, it is almost synonymous to shareholder value.?For example, value creation and value capture are often associated with business strategy to increase shareholder value.?The idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman, the winner of Nobel Prize in Economics in 1976, in the New York Times on September 13, 1970. The concept was further cemented in place by the policy statement from CEO Business Roundtable?in 1997 on “maximizing value for shareholders as the sole purpose of a corporation.” I remember my economics professor at Wharton explained to the class how focusing on shareholder value was the best way to ensure the interests of other stakeholders would be covered. Unfortunately, it has not always worked that well.?

Since shareholder value can not be measured readily, short term stock price, which theoretically is the sum of discounted future cash flow, thus becomes a proxy for measuring shareholder value. One of the problems of course is no one knows what the future cash flow would be and that is where the fun begins. Thus, the stock market goes up and down, depending on what people believe the sum of discounted future cash flow streams would be higher or lower than the current stock price. ?

While the notion of shareholder value is valid to the extent that corporations do need to deliver value to shareholders over the long term, the shareholder value doctrine had come to mean something quite different in practice in different businesses. In addition,?even when one argues other stakeholders could influence the decisions for stockholders via mechanisms such as policy influence or consumer behavior,?future stakeholders do not have a say in the decision making while they might have to bear the consequences. Consequently, there is always opportunity for structural misalignment of today’s business activities vs cost for future generations.

Stakeholder Values vs Shareholder Value?

While the shareholder primacy theory is increasingly being challenged, the shift is subtle and gradual. One of the pivotal moment occurred on August 19, 2019 when the statement by181 CEOs of America’s largest corporations overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder return. In its place, the new Statement on the Purpose of a Corporation declared that companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.

At the same time, through the Internet, globalization, and deregulation, more and more customers suddenly had not only choices, but also reliable information about those choices and an ability to communicate with other customers. The shift from shareholder centric to customer centric has taken effect and firms that focus on continuous innovation for customers. They are organized to be nimble, adaptable, and able to adjust on the fly to meet the shifting whims of a marketplace driven by end-users?are flourishing, and have become the largest firms in the world. By contrast, many firms focused on shareholder value and being run in the manner of the lumbering industrial giants of the 20th century, are struggling. According to a McKinsey study, the life span for S&P 500 companies has decreased from 61 years in 1958 to about 17 years today.

When the cost and benefit of business activities are mostly confined to the business itself, the market driven approach has proven to be the most efficient mechanism not only for economic development but also societal progress. However, when either the cost or benefit largely spills to the society, the shareholder primacy model has been increasingly challenged while focus on environmental, social and governance (ESG) is increasingly part of the equation.

Company Values vs Leadership Behavior

What does this mean for leaders? Leaders have their own individual values but more importantly leaders are responsible for defining the value and purpose for their organizations. Company values are the underlying philosophies that guide a business and its employees and influence the way a company interacts with partners, clients, and shareholders. Most large corporations have a set of core values that captures the essence of their business and culture. The ultimate value of values is not just shaping leadership behavior, but shaping the right leadership behavior.

In contract, entrepreneurs have plenty on their minds, especially as they’re first starting up their businesses. Some leaders treat things like company values and culture more like afterthoughts than top priorities. But whether or not leaders pay attention to company culture, culture will develop. Just like all people have personal values and unique personalities that inform their decisions and behavior, business’ values will influence how employees, customers, and other shareholders are treated. Of course, the way employees, customers, and other shareholders are treated has a huge impact on whether or not a business will ultimately succeed.

In summery, the word value has multiple layers of meaning in the context of business. Ultimately, leadership behavior will create the company culture and leadership values, in term, company values will determine the long term success of the company and sustained value creation to the shareholder.

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