The Value Dichotomy

A few weeks ago, I posted a blog about corporate culture (Breakfast of Champions, Oct 31, 2017) and its implications for valuation. What wasn’t discussed was the dichotomy of the word value.  The Oxford dictionary defines value as:

  1. The regard that something is held to deserve; the importance, worth, or usefulness of something, i.e., the material or monetary worth of something (specifically or relatively)
  2. A person’s principles or standards of behavior; one’s judgment of what is important

There’s an obvious tension here.  The objective of business is to create and grow value as measured by metrics like earnings growth, cash flow, margins, market share or stock price.  Indeed, investors often appear myopically focused on these factors.  Yet, values are the principles and behaviors that can nurture the innovation and resilience to thrive in a changing competitive environment and create shareholder value.

Efficiency is another paragon that needs examining.  There’s something noble about efficiency, who doesn’t want to optimize productivity and minimize waste? Unfortunately, the drive for efficiency sometimes overrides notions of equity as a study by economist Ray Fisman of Boston University indicated. In the end, efficiency is not the same as effectiveness.  Efficiency saves money; effectiveness creates value.

In a similar vein, the concept of meritocracy – rewarding and recognizing based on individual achievement – sounds as American (and capitalist) as apple pie.  Yet too often, rewards appear to flow upward, not outward, raising the classic Ajax Dilemma and doing little to engage employees or encourage teamwork and collaboration.  However, if done well, an incentive system using a balanced set of broadly supportable criteria can create conditions where “none of us is better than all of us.

Can these dichotomies be aligned?  Can values create value?  A corporation’s values (or culture) are shaped by its purpose.  Inherent in corporate purpose is how the business creates value (for shareholders, customers, employees).  Yes, the concept is circular and hard. But the 2015 Intangible Asset Market Value Study by Ocean Tomo suggests that 84% of the S&P 500’s market value is represented by intangible assets, so the hard work is worth it.

Let’s begin by asking questions like:  What is our purpose?  How does our purpose create value (for customers, employees, shareholders)? Do our strategies, tactics and actions support this purpose and create value? What else do you think we should ask?

Lisa Ciota
Lead-IR Advisors, Inc.

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