The cup of early morning black coffee tasted good. âAt least weâve crossed one hurdleâ, sighed Jason Aradvizer, who had a lot on his mind that first day of July. His totally relaxing and satisfying, if not spectacular, golfing vacation had ended just two days ago, but the matters at hand put it in the distant past. Jason was experiencing a typical set of âfirst day on the jobâ thoughts by wondering if he had done the right thing, even though he felt so positive about this new challenge. âWhat better wayâ, he reminded himself, âto conclude a corporate and consulting career than to take on this assignment as a consultant to the Chief Financial Officer of Growthstar Inc., a publicly traded industrial products and services company on the verge of a new market expansion strategy. The opportunity to utilize my thirty-something years of experience to âreinventâ a significant segment of the corporate finance function seems almost too good to be true ⌠butâ, as he mused to himself, âsome poor soul has to do it!â
âThe business landscape has changedâ, he thought to himself. âBoards of Directors are paying more attention to their large institutional shareholders, and making the enhancement of shareholder wealth a âpriorityâ for the Chief Executive Officer (CEO). Many CEOs, in turn, are now realizing that increasing the companyâs stock price is not their challenge alone, and are pushing âshareholder value creationâ down to their business unit and division general managers. Even key staff members in virtually all functional disciplines and support areas are getting âclued inâ to the importance of achieving shareholder value objectives, not just growing revenue and net earningsâ.
He continued talking silently to himself, as he typically did at the beginning of major work assignments ⌠âEvery key manager in this company, and every other âfor profitâ enterprise, needs to gain an understanding of âvalue-basedâ performance and measurement â some obviously more than others. My role is to facilitate both the accumulation and application of a ânew body of knowledgeâ in Finance, for execution in various parts of this company. I need to help these people think differently about the financial aspects of their business. They need to understand that there is a âstoryâ about shareholder value in their financials, which the traditional âaccounting-basedâ approach and measures will not reveal or be able to explain. With the help of the new âeconomic-basedâ approach and measures, I can help these people uncover that message. To do this, I need to make financial theory understandable and useful to themâ.
âThere are also potential âgold minesâ and âminefieldsâ in the companyâs strategies, future plans, and capital investment programs which need to be evaluated. The major analytic routines and the notion of âhowâ and âwhereâ to apply a time-tested valuation technique, as well as a couple of new ones, need to be driven into the organizationâ.
He concluded his self-reflection with the same thought he had felt so many times. âItâs always exciting and always a challenge. Many people in business really do need a dose of ânew thinkingâ to an âage-old problemâ â how to get that stock price up and sustain it. The financial framework, approaches and measures â in and of themselves â do not contain all the answers, but they can help in âdrivingâ managers toward acting in the best interests of the shareholdersâ.
Jason then began to focus on the present situation. His former graduate school colleague, Jonathan Steadfast, had been with Growthstar for the past ten years, rising from the post of Corporate Controller and appointed as the companyâs CFO five years ago. Jonathanâs acceptance of the new âeconomic metricsâ during the past year had convinced Jason that the environment at Growthstar was right for a revamping of the planning and analysis systems, plus key measurement and reporting functions, within finance.
Concerns still loomed in Jasonâs mind, however, as he looked over the corporate organization chart, which had his handwritten notes from conversations with Jonathan, highlighting the various personalities of the corporate vice presidents.
John (Jack) Earningsly, Corporate Controller, was going to be a âtough sellâ â a classic accountant who knew (and used) every accounting treatment to boost quarterly earnings per share (EPS) and often seemed to be more concerned about where an item went rather than what it meant. He scratched his head as he thought about Jonathanâs comment that Jack had not ever made an incorrect accounting entry or misinterpreted a FASB ruling. The fact that Jack hung his CPA certificate above his college degree in his office was not lost on Jason. Neither was Jackâs comment, in their only meeting, questioning what a bunch of new measures would really add to the company, except more work for an already burdened accounting staff. Last year, Jack celebrated his twentieth anniversary with Growthstar, having spent his entire career with the company in some capacity. He joined Growthstar as Accounting Manager after five years with the companyâs auditing firm, having been the junior and senior auditor, then manager, for the Growthstar account. Being one of the longest-serving employees, and the longest-tenured corporate executive, he had no plans of leaving and had developed his own agenda. He also had visions of occupying the CFOâs office if Jonathan decided to move on or retire.
Moving on to Earl DâMark, Growthstarâs Treasurer, Jason smiled. Earl was a fortyish âyoung tigerâ whom Jason had met a few years ago at a shareholder value conference. Earl had a masterâs degree from a rock-solid, if not overly prestigious, mid-west graduate business school, and seemed to almost worship cash flow, deriding EPS as far as was politically palatable in a company which had historically been âearnings drivenâ. âJack and Earlâs luncheon conversations must be interestingâ, thought Jason, wishing he might be a âfly on the wallâ as he mentally compared the almost opposite views of these two key finance executives. From the time of his arrival at Growthstar three years ago, Earl had been one of the proponents of adopting more âeconomic-basedâ ways to analyze the companyâs businesses and investments and, according to Jonathan, had been almost relentless in his admonitions, much to the dismay of Jack. While an experienced treasurer, Earl was a bit âlightâ on some of the more technical aspects of valuation theory and its application, and welcomed an experienced outsider, to add credibility to the undertaking which Jonathan had now sponsored. To indicate his support for the endeavor, Earl had promised to make his best financial analyst available for up to 50% of his time over the next several months, to assist Jason with the ânumber crunchingâ. Earl was, obviously, the âcoachâ â a consultantâs name for a key ally to get support for important findings and recommendations, especially since he had gained Jonathanâs ear during the past year or so, and Jonathan was the CEOâs closest confidant.
Human Resources, which Jason had called âPersonnelâ until it got him in trouble several years ago with an important client, was going to be interesting. Jason gazed attentively at his notes on Florence (known to everyone as âFloâ) Withetide, realizing that he had spent virtually no time thinking about the comments that Jonathan had provided about her. Flo was a classic case of the Horatio Alger success story â a woman approaching middle age who started as an executive secretary in another company. She attended night school and earned a college degree after eight years of part-time study. She then worked her way up through compensation, recruitment and human resource administration to the position of Director for one of Growthstarâs competitors. Almost everyone in Growthstar felt she was a âstealâ when she was enticed to join the company as Vice President, Human Resources to replace the retiring incumbent. For Flo, this job was the crowning achievement for a long road of hard work, so much so that she seemed unwilling to take strong positions on anything that the CEO might not agree with. To call her a âyesâ person would be unfair, but she literally calculated the impact of every comment she made to the CEO, especially on subjects he (the CEO) felt strongly about. âSheâs going to be a very intriguing person to figure outâ, Jason thought out loud, as he mentally progressed to the stage where his work would require changes to the compensation plan. âOh wellâ, he rationalized, âweâre a few months away from that issueâ.
Valerie (Val) Performa, Vice President of Corporate Strategy and Development, was the exact opposite of Flo. Born and raised in an affluent family, she earned her bachelorâs degree from a prestigious east coast college and a masterâs in business, concentrating in marketing, from an equally prestigious west coast university by the age of twenty-four. âSophisticatedâ was the term Jonathan had used as a âone-word descriptorâ for Val. She was also a very gracious person and, while confident of her ability, was one who listened to others and appeared to be open-minded and respectful of the opinions of others. She had moved rapidly in her twelve-year career, and was the youngest vice president ever appointed at Growthstar, having joined the company two years ago.
With a working knowledge of financial concepts, she had developed a reputation as a âbig pictureâ person constantly striving to be on top of â some thought ahead of â the next major strategic breakthrough in the overall global economy and Growthstarâs markets. During the past year, she had formalized the strategic planning process, and the two businesses now had their âfirst everâ strategies. She had collaborated with Earl DâMark to generate âhigh-levelâ financial expressions for these strategies, which represented a good first step in developing meaningful financial outlooks.
In terms of Corporate Communications and Investor Relations, Jonathan had managed this area himself, working closely with Val, Jack and Earl to structure the âmessageâ that he and the CEO took to the investors. This would soon change, as an Investor Relations Officer was about to join the company. Jonathan, while still somewhat tied to the âold schoolâ, did believe in open and candid reporting â good or bad â to the âstreetâ.
Finally, the âbig manâ â Ian Lord â Chairman, President and Chief Executive Officer. Ian was a striking figure. Standing âsix-foot fiveâ, he was a basketball star at a Division 1 university in his âplaying daysâ. Everything about him was impressive, especially his thick, silver-colored hair, and he had built a reputation over the past thirty years as a tough, yet fair, task master â one who demanded nothing short of excellence, both for himself and his subordinates. His only major shortcoming, according to Jonathan, was a predisposition to certain conclusions, even if convincing analysis demonstrated a totally different result. Ian was not irrational, as he could be swayed, but he did go into situations with at least a strong idea, if not a conviction, of what he thought the outcome should be. Ian was not fond of âheavyâ analysis. He wanted answers and decisions, not a lot of detail. Ian had the ability to get to key issues quickly, and was very decisive. He expected no less from those who worked for him. He was the quintessential executive who wanted all memos and letters to be no more than one page, with a recommended course of action supported by brief, yet compelling, rationale. âThis isnât so surprisingâ, thought Jason, as Ian fitted a profile of several CEOs he had worked for and advised.
So, there they were â the executive team he would work with at the corporate level. Jonathan had given him a very condensed overview of the business unit general managers (the âproducersâ) which would have to be expanded in the very near future.
Jason looked at his watch. He had spent nearly an hour reviewing his notes and thinking about the corporate officers and his initial interactions with them. With his âkick-offâ meeting with Jonathan scheduled to start in less than thirty minutes, Jason turned his attention to the outline of the process he had put together three weeks ago to structure and prioritize the major work activities for the next several months.
The process Jason had developed was the culmination of his many years in consulting. Having used it with several clients during the past five years, he felt confident that it would work well at Growthstar. âA cohesive processâ, he reminded himself, âwas so important for an undertaking of this magnitudeâ. However, he also knew that Jonathan was not a process-oriented person. Jonathan would constantly have to be held in check, since he was a lot like Ian in prematurely wanting the âanswerâ. The âanswerâ â âwhat good is itâ, Jason said to himself, âwithout the rationale and supporting analysis!â
Now, it was showtime. Jason took a left turn out of the office provided for him and strolled the short distance down the hall to Jonathanâs office. Jonathan preferred a worktable with straight-back chairs to the comfortable couches that many executives, including Ian Lord, Flo Withetide and Val Performa, had in their offices. For some strange reason, Jack Earningsly and Earl DâMark also had worktables with straight-back chairs in their offices. The two men, who had now known each other for nearly thirty-five years, extended warm greetings as Jason entered Jonathanâs office. Jonathan had instructed his assistant not to stop or announce Jason, unless an important meeting or conference was going on.
âSo, youâre going to straighten us out financiallyâ, thundered Jonathan.
Some people felt intimidated by the volume and intensity of Jonathanâs voice, but Jason was not. Besides, he had listened to that voice for so long, that its volume had lost its impact. âIâm going to give it everything I haveâ, Jason shot back, âassuming the CFO doesnât âstonewallâ me!â
He handed Jonathan the one-page chart he had put together outlining the major tasks and approximate time frames for their completion. âFirstâ, Jason stated, âwe have to get everyone on the corporate staff âon boardâ with some basic definitions and perspectives as to what shareholder value is all about. Then, I explain the transition from âaccountingâ to âeconomicsâ and introduce âvalue-based metricsâ and âEconomic Profitâ (EP)â.
At that point, Jonathan gave Jason his first reaction. âA year ago, Jack would have tried to âblow this apartâ right from the outset. He knows that this tactic wonât succeed now, because the stock market evidence is so compelling against EPS as a proxy for equity value, that heâll look foolish. In spite of his strong support of accounting measures as adequate for managing the company, Jack is no fool, so maybe this will not be that major an issueâ.
âI hope notâ, said Jason, âbecause it can sidetrack the entire process. However, even in the worst possible scenario, it will only cause a delayâ. Jason continued ⌠âthe next major step is to do a âvalue assessmentâ of the companyâs business units (BUs). This analysis should highlight performance which creates shareholder value versus that which destroys it, and performance that is value neutral. We begin the assessment work by analyzing the Cost of Capital. As I think you know, this goes well beyond the cost of debt financing to capture the most important and expensive financing instrument used by most companies â namely, common equity. Weâll want to determine if we have one cost of ...