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True Value

If you ask a CEO to identify the primary target of his job, he might answer, “To make as much …

If you ask a CEO to identify the primary target of his job, he might answer, “To make as much profit as possible,” “to train my successor,” or any number of special goals, such as improving market share or going global.

These are worthy objectives for all chief executives, but I don’t consider any of them to be the overriding, all-important goal a CEO should achieve during his tenure. Rather, I suggest he should attempt “to enhance the value of the enterprise.”

According to The Economist, only 29 companies on Fortune magazine’s top 100 list in 1956 made the grade in 1991. The sad news is that 71 companies couldn’t keep up the sales pace; the glad news is that 71 other companies had chief executives who moved them up and into the top bracket.

Value, of course, means more than mere sales growth. It is a combination of return on investment, shareholder perception, and doing a lot of things right over a sustained period of time. Ultimately, value created should be reflected in the stock price, but even the infinite wisdom of the stock market sometimes results in short-term distortions. True value has to evolve from the positive steps management takes to build a consistently stronger business base.

What should a CEO do today to enhance the value of his company tomorrow? I suggest five areas demand his constant attention.

  • Credit. You must gain and hold the confidence of your lenders and creditors. When your credit rating slips, so does your perceived value. You have to pay your bills and meet your obligations before you can borrow money. I once ran a company that was out of cash and borrowing power; no matter how great my ideas were, they meant nothing and benefited no one without the ability to implement them.
  • Quality. A Total Quality Management program that applies to your products, processes, and customer services is a must. It should never go unenforced or be allowed to diminish. My hunch is that a major reason 71 companies slipped out of the top group is because they slipped in product quality and customer service.
  • Capital. To be a low-cost, top-quality producer, you must keep your plants and processes up to date. Many companies will go for years without reinvesting even as much as their depreciation. Many companies regularly do not spend their capital budgets; they are too busy and too interested in making a short-term profit to invest in the long term.
  • Technology. In these days of short-lived product cycles, it is even more important to see that you do not lose out to new ideas, new materials, new gadgetry. Once behind, it takes too long to catch up. Some companies never regain a lost position.
  • Players. No matter how many computers and robots you have, people still run companies. The company with the best people usually wins because they do the necessary things that bring the sales, make the profits, and grow the business.

American managers, as well as investors and analysts, are often criticized for their short-term approach. Every quarter involves a frantic scurrying for sales and a scrounging for last-minute profit dollars. In turn, the first month of the next quarter is always down, and catch-up ball starts anew. That’s a lousy way to run a railroad.

I am impressed with the way some of our best CEOs and companies have been able to “merchandise” their long-term programs of value enhancement to investors. They patiently and tenaciously stick to their game plan of turning out high-quality products and services at competitive prices. They judiciously retain strong research budgets despite companywide cost-cutting programs. They keep their eyes on their balance sheets, their people, and their future.

Inevitably, all companies have down quarters, and the market nearly always punishes them for doing so. But if the value is there and has been effectively communicated to the investment community, sooner or later, growth will, revive.

Heaven knows, today’s CEO is pushed and tugged from every angle to be in the vanguard of all kinds of meritorious programs. He is told that he must take personal command of environmental affairs, global expansion, computer utilization, acquisition negotiating, government liaison, minority uplift, investor relations. The list never stops.

These are important functions, but they are not primary ones for the CEO. His primary job is to get the right people, arrange for adequate financing so they have modern plants and up-to-date technology, and then see that they continuously turn out competitive products and services. That’s how you build value.

There are many criteria by which a CEO’s performance can be judged: sales growth, market share, stock price, and debt reduction. In my book, if a CEO has measurably enhanced the value of his company during his time in office, then I say, “Well done!”


Formerly the CEO of F.&M. Schaefer (1972-1977), Robert W. Lear teaches at Columbia Business School, where he is Executive-in-Residence. He is an independent general partner of Equitable Capital Partners and holds directorships with Cambrex Corporation Inc.; Crane Company; Scudder International and Scudder Institutional Funds; Korea Fund; Medusa Corporation; WICAT Systems Inc.; and Welsh, Carson, Anderson, Stow Venture Capital Co. His latest book is “How to Turn Your MBA Into a CEO.”

About robert w. lear