Research shows that when executives and boards of directors achieve dynamic, long-term goals, they create a substantial value. This focus on the long term results in higher shareholder value, creates more opportunities like jobs and contributes significantly toward growth.
To do this, corporate executives must keep up with changing economic and business trends, adopt new behaviors, discard obsolete patterns, and empower themselves and their teams to make sound decisions with long-term objectives. Their most crucial task focuses on continuous planning for the future, forming a strategy for sustainable growth, reviewing the teams’ performance, and evaluating the outcome.
To illustrate, consider the contribution of CFOs and their finance teams. The finance teams must make sure all critical, relevant information for value creation is readily available for internal decision-makers, capital contributors, and investors. This information includes company performance, new business opportunities, market risks to watch out for, and business trade-offs.
Insights from CFOs and their teams enable business leaders and other executives to enhance their understanding of value creation beyond financial statements. They also guide developing a balanced scorecard that gives an entirely comprehensive view of the business, its value, and its market performance.
According to the Value Reporting Foundation, “By delivering information on value creation, including on strategic assets, such as customers, innovation and data; environmental, social and governance (ESG) factors; and wider impacts on society and the environment, CFOs can provide insight into the 80% of enterprise value that is hidden from the balance sheet.”
The advantages of long-term vision are visible, although the practical facets are not easily understood and applied. So, let’s take a look at five things that a company focused on value creation does that others neglect.
1. Ensure sufficient investment of capital and talent in large-scale business initiatives.
Many businesses do not want to invest in large-scale initiatives because they fear their investment will not give them timely returns. Instead of investing to stay ahead of their competitors, they play not to lose. Established businesses with a clear, long-term vision identify the specific strategic moves that will give them an advantage over the competition. These companies make sure ample resources are committed to new product development, sales & marketing efforts, and nurturing talent. Bottom line: prioritize investment in high-leverage scenarios to juice returns!
2. Focus on building a portfolio of strategic initiatives that deliver higher returns.
Businesses must dedicate sufficient resources to initiatives that promise to yield returns exceeding the cost of capital. It’s not necessary that every business investment must give higher returns over investment. Instead, the aggregate earnings of an entire portfolio of such initiatives have a greater chance of exceeding the cost of capital. As a result, such companies expect to create more value in the long term.
Playing to Win: Tesla
Tesla’s goal was to be the most prominent car company in the world. They understood that to become the most prominent car company by sales volume, they had to beat lower-end consumer car space, i.e., cars costing less than $30,000. Instead of benefiting from economies of scale by creating a cost-effective, low version of the electric car, Tesla manufactured one of the most expensive, luxurious, fully-loaded sports cars: the Roadster.
The following factors played a critical role to support their vision:
- They understood that it was virtually impossible to manufacture cost-effective, mass-market electric cars as a start-up to benefit from economies of scale.
- Their product was so unique that they didn’t want to rely on partnerships or outsourcing.
- Car batteries presented the most significant technological hurdle and were another bottleneck in production. To deal with this complex issue, Tesla took charge (ha! get it?) of the supply chain by investing in battery manufacturing factories. They used these batteries in other business verticals, such as the Powerwall.
- Their strong marketing effort focused on the best possible customer experience.
2. Allocate capital and talent to businesses and initiatives that create the most value.
A business with a strong focus on attaining value needs a sound understanding of the competitive business landscape. This means that the executive team must monitor their business’ current position and evaluate whether it should enter new markets or exit any business deals to tackle the changing economic environment. Companies must also willingly allocate talent as they reassign capital.
3. Generate value for employees, customers, and other stakeholders.
Motivated, results-oriented employees get more done than those who are discontented and focused on work output. This is one of the main reasons companies with long-term vision tend to work consistently toward improving results for all their stakeholders. For example, a supplier who has been paid promptly and is treated well is more likely to collaborate with the business owner on a new project and more likely to accept a delay in payments.
Similarly, when a company is focused on enhancing the working conditions of its employees and rewarding them with non-cash benefits such as insurance, paid vacation, and flexible work schedules, it has a winning culture where all the employees are equally motivated to work toward growth and success.
3. Overcome the desire to take actions that promote short-term profits.
Temporary dips in revenue tempt businesses to abandon their long-term strategies and work to amplify short-term results. Shifting their focus weakens their competitive business position in the market. Results-oriented, long-term companies resist temptations like cutting off growth investments halfway through the project and cost-cutting initiatives that weaken employee morale and competitive position in the market.
5. Understand executive roles regarding long-term growth and value creation.
The CEO and the executive team have distinct roles in leading a company through long-term growth and value creation.
The Executive Team
- They communicate the need for strategic business investments on time and ensure the approved business initiatives are funded and the right resources are allocated to carry out these initiatives.
- They work with the CEO (or business owner) and help evaluate business strategy, the company culture, management teams’ strengths and weaknesses, and the financial performance of new business initiatives.
- They refine and structure compensation, considering post-retirement income.
- They are accountable for ensuring that all new business initiatives are funded on time, the appropriate resources and staff are allocated, and those new strategic initiatives are protected from short-term earning pressure.
- They are proactive, ensuring management systems adapt to a long-term, strategic mindset. A bold CEO takes risks that position the business better for future prosperity and avoids making decisions under another person’s influence or personal prejudice.
- They proactively identify and cultivate good business relationships with long-term, independent investors.
- They work with the finance team and CFO to understand and determine the link between nontraditional metrics and financial statements. This helps to prevent unplanned business trade-offs, specifically short-term ones.
To create value, businesses must constantly strive to reorient towards long-term business objectives. This also means business leaders and their executive teams should evaluate themselves to adopt productive behaviors while abandoning unproductive patterns.