2006 Volume 9 Issue 3

Achieving Corporate Success and Maximized Value

Achieving Corporate Success and Maximized Value

A six-stakeholder strategy to create long-term corporate success while creating value for the company.

Author’s Note: The most commonly asked question addressed to me as a financial consultant has always been very straightforward: What are the factors necessary to develop a corporate strategy that creates long-term corporate success while at the same time creating value for the company? The purpose of this article is to give my straightforward answer.

I have always maintained that the corporation is a system dependent on the integration of stakeholders. This is not a new concept. The concept of stakeholders has been expressed since the formation of the corporation and the transfer of management from owners to agents. The question, therefore, revolves around the choice of the driver stakeholders.

It is the author’s contention that there are six stakeholders that must be simultaneously optimized. These are the shareholders, the employees, the leadership, the customers, the suppliers, and the community. Again, this assertion is not original. Nevertheless, it is the author’s mission in this article to restate the significance of these stakeholders in a pragmatic way that will lead to their adoption as part of an integrated corporate strategy. The conclusion of this article will offer the review of a company that has achieved an organization that is structured in such a way that it optimizes all six stakeholders.

Maximized Shareholders

The shareholder must come first in this list simply because shareholders provide the capital that allows formation of the enterprise that will accomplish a business strategy. The concept of the maximization of shareholder value has dominated the literature since the early 1950s. It should be noted many organizations believe that this is the sole driver. It is clearly not the sole driver if one considers the long-run. While the concept of maximization of shareholder value is intuitively simple, the financial variables are not.

There are ten financial drivers, in this author’s opinion, which should be satisfied. Their selection was not easy, and their inclusion comes predominantly from research conducted on beta.[1] The beta of a company is the mostly widely expressed measurement of corporate risk, and it measures a public company’s sensitivity to the market return. If a management team focuses on these drivers, an enhanced, if not maximized, corporate value will certainly follow in the long-run. These ten financial drivers are as follows:

1. Growth in Earnings
2. Variance of Earnings
3.Growth in Cash Flow
4.Variance of Cash Flow
5.Operating Margin
6.Return on Equity
7.Dividend Payout Ratio
8. Long-term Debt to Equity
9. Sales Growth
10.Z Score

The financially successful company will exhibit superior results in virtually all ten drivers. Further, the company should also exhibit the best five-year total return to shareholders. The most common way to measure this success is to compare a particular company to its peer group. The successful company will normally be observed to have the following differentiations since they have been embedded in its corporate strategy.

1. One standard deviation below the mean:variance of cash flow and variance of earnings.
2. One standard deviation above the mean:growth in cash flow, growth in earnings, operating margin, return on equity, growth in sales, and an enhanced Z-Score.
3. Within one standard deviation or above the mean:dividend payout ratio.
4. Within one standard deviation or below the mean:long-term debt to equity.

The financial variables are expressed as unique values however they are calculated. Therefore, for each variable, a mean (average), a standard deviation (the dispersion around the mean and a risk measurement), and a variance (also a risk tool equal to the square of the standard deviation) can be calculated. The Altman Z score is a multi-factored predictive model of bankruptcy. While it is quite dated, as well as the resulting statistics not usable for predicting its original purpose of bankruptcy, it nonetheless is quite useful in trending a company in conjunction with the other financial variables noted above.[2]

Empowered Employees

Most companies fail to recognize and empower their most important asset: employees. Companies that truly exhibit employee empowerment through emphasizing willingness to serve, communication, and common purpose develop a work force striving and driving for success. This drive develops a culture of “can do” regardless of the circumstances. The global competitive environment is and will become more brutal for companies this century. Without this “can do” philosophy, most companies will disappear.

It should be clearly noted that many individuals think of employee empowerment only in behavioral terms: allowing a free-flowing, non-structured environment for employees. Instead employee empowerment should be defined in terms of the culture of the organization, one that emphasizes, as already noted, communication, willingness to serve, and common purpose proposed so many years ago by Chester I. Barnard.[3]

Testing of this concept is rather straightforward. Do individuals want to work for the corporation, or are they just looking for a job? Empowerment occurs when it is the former. These empowered employees will have the ability to learn (and improve) faster than their competitors. This empowerment allows companies to develop the only relevant and truly sustainable advantage, as noted by Hatch and Dyer.[4]

The written strategy of a corporation is but a document. This document, which is always changing in response to the competitive environment, must be implemented by empowered employees if the corporate goal is to be achieved. To accomplish that goal, it is essential that the corporate culture be robust, satisfied and led by leaders at all levels, not just by managers. (Please refer to the author’s previous article, “The Impact of Empowered Employees on Corporate Value,” Graziadio Business Review.)

Enlightened Leadership

Everyone recognizes the importance of top management. Top management must be committed to each and every one of the other variables or excellence simply will not occur. Leaders simply must lead the “can do” attitude of a corporation. Many times this observed attitude falls under many individuals’ definition of pornography: “I know it when I see it.”

Warren Buffett is America’s best known investor. He is also, perhaps, America’s best business analyst when it comes to evaluating top management. His three top management tenets are (1) Is management rational?; (2) Is management candid with its shareholders? (or, as this author believes, its stakeholders); and (3) Does management resist the institutional imperative?[5]

The first tenet refers to the allocation of capital. Companies have life-cycles, and top management must recognize at what point in their life-cycle they are operating. Candor refers here to financial candor (truth) for Buffett; candor for this author refers to conduct with all stakeholders. The institutional imperative is the lemming-like tendency of top management to imitate the behavior of other top managers no matter how silly or irrational it may be.

John Farrand, a former executive with Time Warner, would add one more tenet: Is management focused for success? He notes that there are many great examples of prestigious companies that were once innovators but fell from grace, most often because they had lost sight of what it was that created their once unique position. Simply said, top management often does not understand their industries and the ever changing global dynamics that affect both their products and industries.

Enlightened leadership must recognize that operating a business is a journey and not a destination. Top management must therefore recognize this reality and remain focused at all times on the importance for continued success of the other five drivers.

Customer Drivers Satisfied

Most companies also tend to forget their second most important asset: customers. If they do not forget the customer, they tend to look at basically one item: customer satisfaction. Indeed, we have a standardized satisfaction benchmark called the American Customer Satisfaction Index.

The problem is that as useful as this standard satisfaction benchmark can be, it fails to get to the heart of the problem. The corporation must focus on the drivers of customer satisfaction which are complex because these drivers can be unique to a given customer.

This key driver analysis, also known as an Importance Performance Analysis, is the study of the relationships among the many factors used to identify the most significant ones for each identified customer set. Many believe that the customer set centers on recognizing the different periods in the life-cycle of the customer, as suggested by Dr. William Bleuel. (Please refer to his Graziadio Business Report article, “Cultivating the Customer Asset.”)

The process outlined here is threefold. First, it is necessary to conduct a standardized satisfaction survey. Second, the information revealed by the survey and one-on-one discussions with customers will yield a list of potential drivers. Third, a driver satisfaction customer survey is then conducted.

The outcome will be a Customer Key Driver Chart. The key driver chart plots in a graphic manner the results of a key driver analysis. Each driver is plotted on the graph’s X-axis according to the company’s performance, and its importance to the customer’s satisfaction on that driver is plotted on the Y-axis. This plot generates four quadrants, the most important of which is located in the lower left quadrant. This driver reveals high importance to customers, but the company’s performance is low. Consequently, this quadrant points to the area of required action by the company. The analysis of customer drivers is continuous. The objective is straightforward: to eliminate all items in the lower left quadrant. An example is shown below.

The customer rates on time delivery of product to customer from the company’s importance at 95 percent (X), but the company rates its performance on the item at 30 percent ( ). This is a clear example of a customer driver being ignored.

Supplier Drivers Satisfied

The next stakeholder to be satisfied is the supplier. Many are surprised at the inclusion of this group as a stakeholder. However, the importance of suppliers cannot be understated. The business organization needs to receive on a timely basis high quality and properly priced materials in order for the company to satisfy not only the customers but also to enhance the profit margin to the company. Thus it is necessary to develop a Supplier Key Driver Chart in the same fashion as noted above. The organization then must be prepared to meet the needs of the suppliers or face vendor changes.

Community and Social Responsibility

The corporation does not exist in a vacuum. It is a member of the community, so the corporation must be an active member of that community. There are many ways to be an active participant. The best way that the author has observed is predominantly through the employees. Corporations must encourage their employees to become active in local community organizations. It is these employee selected community organizations that the corporation should then support.

The author believes that all employees should be able to donate up to 5 percent of their salaries to such organizations and that it is the responsibility of the corporation to match such contributions. This way the community ventures are equally supported both by the employee and the employer within the local community.

Furthermore, it is the responsibility of the corporation to conduct all of its activities in a socially responsible way that is, by showing to all parties respect, fairness, and moral integrity at all times and expecting the same in return. Unfortunately, this will become less and less true as cultures of varying or diverse values infiltrate and dominate global business.

Example of Successful Implementation of the Six Stakeholder Strategy: Whole Foods

Whole Foods Markets is the largest natural and organic foods grocer in the United States. It owns and operates 166 stores in 29 states as well as in Canada and the United Kingdom. Stores actually operate under a variety of different names, including Whole Foods Markets, Bread & Circus, Fresh & Wild, and Harry’s Farmers Markets, Inc. The stores average 31,500 square feet of space and have 31,500 employees. For the fiscal year ended 2005, the company had $4.7 billion in sales with a net income of $163.7 million.

This company was chosen to review because it is listed in the 100 Best Companies to Work for 2006.[6] It was ranked 15th, an improvement over its 30th rank in 2005. For this reason, we can assume that the empowerment of employees has been achieved. To better understand this example, it is strongly suggested that you visit their website at www.wholefoods.com. Indeed, a review of the company’s website reveals that the company talks about empowered work environments, self-responsibility, self-directed teams, open and timely information, and recognition of the collective creativity and intelligence of its work force. The site emphasizes the shared fate of the company and its employees.

The next task is to determine Whole Foods’ acceptable position on customers, suppliers, and the community. The company’s website features numerous references to customers using what appears to be their perception of the consumer drivers. Terms noted include passion for food, high quality standards, extraordinary customer service, education of customers, meaningful value, retail innovations, and an inviting store environment. As a customer at Whole Foods, these statements are true for this author.

The site also notes that Whole Foods’ trade partners are customers’ allies in serving the company’s stakeholders. The site further notes that trade partners also treat customers with respect, fairness, and integrity at all times and expect the same in return.

The Shareholder

The final stakeholder to be discussed is the shareholder. The Whole Foods website notes that the organization wants to create wealth for shareholders through profits and growth. In so doing, the organization recognizes its stewardship responsibility. Whole Foods clearly states that they are increasing long-term shareholder value, recognizing that profits are essential to creating capital for growth, prosperity, opportunity, job satisfaction, and job security.

What Are the Financial Results?

How well does Whole Foods match our a-priori financial goals? The first task is to develop a peer group for comparison. Since Whole Foods is in the Value Line Investment Survey of 1700 stocks, we chose only stocks in that publication and in the grocery industry. Whole Foods is classified as a large cap stock. Only three other stocks were classified as large cap: Albertson’s, Kroger, and Safeway. A financial statistical study was conducted on these stocks for the period 1998-2005. The financial data was either for an eight year, a five year, or the latest period, depending on the item. The following comparisons could be made about Whole Foods and its peer group. Whole Foods (WF) was found to be:

1. One standard deviation above the mean in earnings per share growth.WF was well in excess, approaching almost two standard deviations above the mean. (Eight-year trend)
2. One standard deviation below the mean in earnings per share variance.WF fell extremely close to one standard deviation, but the company remained within one standard deviation below the mean. (Eight-year trend)
3. One standard deviation above the mean in cash flow growth.WF was over three times the standard deviation above the mean. (Eight-year tend)
4. One standard deviation below the mean in cash flow variance.WF was below the mean but within one standard deviation of the mean. (Eight-year trend)
5. One standard deviation above the mean in operating margin.WF was well above the mean and well above multiple standard deviations. (Eight-year trend)
6. One standard deviation above the mean of the return on equity.WF did not perform well on its return on equity. In fact, it did not achieve the mean, let alone be one standard deviation above. (Latest annual)
7. Within one or more standard deviations of the mean in dividend payout.WF fell within one standard deviation. (Latest annual)
8. Within one or less standard deviations of the mean in long-term debt to equity.WF has virtually no long-term debt. As a result, it is multiple standard deviations below the mean. In fact, the debt ratio is so low that the form of financing is significantly different than that of its peer group. (Latest annual)
9. One standard deviation above the mean in sales growth.WF had a growth rate in sales well above the mean and standard deviation. Indeed, the company’s growth was multiple standard deviations above the peer group. (Eight-year trend)
10. One standard deviation above the mean for the Z Score.WF Z-Score was above the mean and one standard deviation. The trend of this financial statistic was impressive compared to the competition. (Five-year trend)

The above financial statistics clearly show the superior performance of Whole Foods. While the company did not receive a perfect score, it did attain a score of 80 percent. Whole Foods’ marks are clearly well above those of its peer group. The return on equity, the only real disappointment, can be attributed to the company’s low level use of long-term debt. Using a prudent amount of long-term debt instead of equity to finance its growth in capital assets would enhance the company’s return on equity.

Executive Compensation

One other item that should be discussed concerns executive compensation. In the author’s opinion, Whole Foods’ executive compensation is clearly not out of hand nor excessive. Whole Foods has adopted a policy that no executive can earn more than 14 times the employee average salary. The Chairman and CEO, John Mackey, earned $342,000 last year. This salary should be contrasted with that of other major companies where executive compensation is often over 200 times the employee average salary! This is clearly a positive for the organization. (On the other hand, Whole Foods now has certain of its “free range chickens” available for sale in its markets named! Hence, the author could have purchased and served Sue for dinner. Sometimes organizations can get carried away as well.)

Capital Markets Appraisal

How did the capital markets appraise the performance of Whole Foods? The five-year annual total return of the peer group was -7.2 percent with a beta of 0.72. Whole Foods achieved a 38.9 percent five-year annual total return with a beta of 1.08. Even adjusting for risk as expressed by the Capital Asset Pricing Model’s ex-post beta, Whole Foods stock market performance was excellent.


The purpose of this article was to give a personal view of a pragmatic framework to explain the steps needed to achieve superior if not maximized corporate value. Of course there are many other variables to consider that would even further enhance that value. The author contends, however, that the integration of these six stakeholders in a meaningful business strategy will lead to superior, if not maximized performance.

[1] Rosenberg, B. and J. Guy, “Prediction of Beta from Investment Fundamentals,” Parts One and Two, Financial Analysts Journal, May-June and July-August, 1976.

[2] Altman, Edward, “Financial Ratios, Discriminate Analysis, and the Prediction of Corporate Bankruptcy,” Journal of Finance, September, 1968.

[3] Barnard, Chester I., Functions of the Executive, Cambridge, Mass.: Harvard University Press, 1938.

[4] Hatch, Nile W. and J. H. Dyer, “Human Capital and Leaning as Source of Sustainable Competitive Advantage,” Strategic Management Journal, 25, 2005.

[5] As reported in Hagstrom, Robert G., The Essential Buffett, New York: John Wiley & Sons, 2001.

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Author of the article
Darrol J. Stanley, DBA
Darrol J. Stanley, DBA, is a professor of finance at the Graziadio School of Business and Management. He is well-known as a financial consultant with special emphasis on valuing corporations for a variety of purposes. He has also rendered fairness opinions on many financial transactions, and he has been engaged by corporations to develop strategies to enhance their value. He has served as head of corporate finance, research, and trading of four NYSE member firms. He likewise has been the principal of an SEC-registered investment advisor. He has completed global assignments as well as having served as Chief Appraiser of International Valuations/Standard & Poor’s in Europe, Central Europe, and Russia.
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