I'm not a huge fan of financial years: I’m concerned they have a detrimental effect on the delivery of great strategies, and lead to the erosion of customer and shareholder value.
Why? Most, if not all, organisations seek to be around for the long term and create strategies which look forward five to ten years. The aim of a great strategy should be to provide continuous, trusted value to customers, who become loyal friends and advocates. Shareholder value should be an outcome of delivering value to customers, not the primary purpose of the strategy itself.
When annual profit-drivers are used as a basis for awarding bonuses, people will naturally push hard to achieve the numbers. The closer year end gets, the pressure to deliver sales targets, cut costs or people, offer discounts, and delay project spend increases. Usually, a month or so out from year end, management wields a metaphorical whip to drive everyone to the finish line. None of this delivers anything of long-term value to your customers and creates a “stop-start” culture which damages your peoples’ confidence in the strategy.
Once we’ve got through a year end, we breathe a sigh of relief and then the whole cycle starts again. We tell ourselves, “this year will be different: we’ll get that new technology that will make it simple for customers to do business with us; we’ll be able to develop and test new products and take the old ones off the shelf”…that is, until 3 months out from the next year end where we may have to put the brakes on again.
So, financial year ends don’t really work for your customers or people, however, do they work for shareholders? It depends: if your shareholders support the reinvestment of profit in delivering the strategy, that’s fine. But if shareholders expect dividends to increase at a higher rate than customer value and loyalty, they’re eventually going to erode their own investment. It seems strange to invest in a company, then effectively divest from it by taking larger and larger dividends at the expense of enhancing customer outcomes.
Part of the problem, particularly in publicly listed companies is that a large proportion of the shares are owned by institutional shareholders i.e. asset management companies. These companies may be running KiwiSaver funds, retail investment funds, large superannuation funds, etc. Their strategies are usually to deliver an “upper quartile return v their competitors” through capital growth and/or dividends. If dividend yield is the objective, then money is being divested from the underlying company. And if capital growth is the objective, and the share price is influenced by profit, then that also leads to the stop: start behaviour discussed above. The irony is that, in the context of KiwiSaver, the customers of the underlying company are likely to also be invested in it through their KiwiSaver funds!
In short, if your shareholders, institutional or otherwise, are not aligned with your long-term strategy and the need to generate continuous, trusted value to customers, you’re going to have problems.
What can we do to address these issues? Well, there’s a need for the big fund management companies to think more like private equity investors, and align themselves with the strategy of the underlying business in which they are invested; dividends should not be paid to the detriment of customer outcomes; we need to move away from emphasising profit drivers over value created for customers when awarding bonuses; and scorecards should not be balanced in favour of short term financial performance versus long term customer measures.
Sound simple doesn’t it? Obviously, it’s not or we would be doing it already. But we can start by having some frank conversations about the thinking and behaviour that we’re driving. It’s time to get everyone behind generating customer value, because we’re all customers, and most of us are investors of one kind or other.
Suzanne is a professional director, visionary strategist, coach, hypnotherapist specialising in business and public speaking, and managing director of Communication Counts NZ.
To contact Suzanne, email suzanne@communicationcounts.nz