How to Maximize Shareholder Value
“Maximizing shareholder value” is business-speak for “being the best you can be”, and it is a hot topic in today’s business world. And while the concept is an important one, unfortunately, the debate tends to be framed incorrectly.
The problem lies in our business culture’s focus on “precision”, even if that sense of precision is an illusion. We are a society of numbers. We like formulas and things like Efficient Market theory because they attempt to explain elusive concepts in a way that can be quantified. The problem is these formulas and theories often don’t work. Much like you can’t describe the beauty of a sunset or the feeling of falling in love with formulas, there is no “magic-formula” for value maximization. It is quite simply, an unquantifiable thing. And while that may be the case, you wouldn’t get that impression from many of today’s business leaders. Instead, you will probably hear some textbook answer about how “minimizing the cost of capital” would maximize shareholder value. In other words, valuation-maximization discussions tend to imply that things like cost of capital are the independent variables (i.e., drivers) of the shareholder value equation. I like to think it’s just the opposite.
Think about it. Would Coca Cola be what it is today if it was obsessed with having the lowest cost of capital? What about McDonalds? Or Toyota? Nike? How about Apple? The answer is NO. The best companies in the world (i.e., the ones that have maximized shareholder value) are the ones that obsess over their customers. They obsess over delivering the best product, the best service, the best experience to their customers. What ever it is they do, they focus on doing it best. Are financial concepts like cost and return on capital important? Absolutely; and the best companies realize that it’s a balancing act. But focusing on obtuse distractions like achieving the lowest cost of capital virtually guarantees a business will not succeed at anything, especially achieving the lowest cost of capital.