《金融时报》：股东价值是结果而非目标

In the first article of this two-part series I explained how I define the term shareholder value: whether or not a company is able to generate a sustained return on capital employed (“ROCE”) above its cost of capital. This time I want to link that definition with shareholder activism.

When an activist shareholder becomes involved in a company, the modus operandi is often something like this.

1. Acquire a stake in the company, usually via on-market purchases;

2. Campaign noisily for change, which can entail the company trying to sell itself to an acquirer, splitting itself into a number of listed entities for each of its activities, taking on more debt, buying back its own shares, or some combination of these;

3. The share price rises as a result of excitement about this activity, which it is claimed will “create shareholder value” and benefit all investors;

4. Sell the shares at a profit.

Nothing wrong with that, you might think, and certainly not from the point of view of the activist. But there is plenty wrong for those of us who are long-term investors and actually want to own the shares to gain from their ability to compound in value over time. We are often left trying to make sense of fragmented businesses, new management teams, higher leverage, the costs of separation or integration and financial statements which are rendered incomprehensible by many adjustments.

This particular problem of activism comes from confusing creating shareholder value with making the share price go up. One should lead to the other, but when short-term share price movements become the main objective, as they clearly are with many activists, the inevitable byproduct is future problems for the business and its long-term shareholders.

You might conclude from this that the main target of my criticism is activists who pursue corporate action to promote short-term share price gains. But there are plenty of pitfalls for exponents of shareholder value, including those who embrace my own view on how to measure its creation.

Too often, the measures of shareholder value creation become the objectives of management. ROCE is after all only a financial ratio. In order to improve it, executives focus on getting the numerator to rise or reducing the denominator, or both.

The numerator is usually taken as operating profit, which may be increased by raising prices (which may lose market share and build a platform for competitors), cutting costs (which is not a likely source of growth), and cutting research, product development and marketing spend (to the long-term detriment of the company).

When it comes to the denominator, managers usually look to reduce the capital employed by “de-equitising” the business, using debt to buy back shares.

But if the pursuit of improving shareholder value in the form of high ROCE can lead to problems, they are nothing compared to those which can arise when growth in earnings per share is the target. A fixation on earnings per share (EPS) is one factor behind the mania which has developed for share buybacks. In an era of zero interest rates, every buyback which reduces cash or increases debt can be claimed to be “accretive to EPS”. Sadly, it doesn’t actually make the shrunken share base any more valuable.

When it comes to misconceived actions which aim to boost shareholder value metrics, Stanley Druckenmiller, the legendary hedge fund manager, has described IBM as a “poster child”.

Last year, IBM abandoned its 2015 EPS target of $20 per share, having made only $10.76 in the first three quarters of 2014. The computer services business had delivered its “IBM 2015 Roadmap” in May 2010, purporting to show how IBM would increase its 2010 EPS of $11.52 per share to $20 by 2015.

Quite why any other investor should be impressed with this goal, even if IBM could achieve it, is beyond me. As I never tire of reminding people, EPS takes no account of the capital required to generate it, or the return on that capital.

The IBM “road map” described a number of “bridges” to growth in EPS. Roughly 40 per cent was to come from revenue growth, although this included acquisitions; 30 per cent “operating leverage” (cost cutting, in English); and 30 per cent from share “buybacks”.

Acquisitions, cost cutting and share buybacks are not a particularly high-quality source of growth. The cost cutting and share buybacks are certainly finite — you can’t shrink your business to growth.

The outcome for IBM has been inevitable, and not good. Investors and executives need to realise that the creation of shareholder value is an outcome — not an objective.

Terry Smith

Financial Times