Customer Value, Shareholder Wealth, Community Wellbeing : A Roadmap for Companies and Investors PDF
Preview Customer Value, Shareholder Wealth, Community Wellbeing : A Roadmap for Companies and Investors
Customer Value, Shareholder Wealth, Community Wellbeing Denis Kilroy (cid:129) Marvin Schneider Customer Value, Shareholder Wealth, Community Wellbeing A Roadmap for Companies and Investors DenisKilroy MarvinSchneider TheKBAConsultingGroup TheKBAConsultingGroup Melbourne,Victoria,Australia Melbourne,Victoria,Australia ISBN978-3-319-54773-2 ISBN978-3-319-54774-9(eBook) DOI10.1007/978-3-319-54774-9 LibraryofCongressControlNumber:2017948734 ©TheEditor(s)(ifapplicable)andTheAuthor(s)2017 Thisworkissubjecttocopyright.AllrightsaresolelyandexclusivelylicensedbythePublisher,whetherthewhole orpartofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation, broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformationstorage andretrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodologynowknownor hereafterdeveloped. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublicationdoes notimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevantprotective lawsandregulationsandthereforefreeforgeneraluse. Thepublisher,theauthorsandtheeditorsaresafetoassumethattheadviceandinformationinthisbookare believedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsortheeditors giveawarranty,expressorimplied,withrespecttothematerialcontainedhereinorforanyerrorsoromissions thatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictionalclaimsinpublishedmaps andinstitutionalaffiliations. Coverillustration:AlamyimageHDE2MP,“AndreiKukla/AlamyStockVector” Printedonacid-freepaper ThisPalgraveMacmillanimprintispublishedbySpringerNature TheregisteredcompanyisSpringerInternationalPublishingAG Theregisteredcompanyaddressis:Gewerbestrasse11,6330Cham,Switzerland Embracing inclusive capitalism by transforming listed companies into enduring institutions that continually seek to create value for customers, build wealth for shareholders and enhance the wellbeing of the wider community … To our teachers … ’ for Denis at Lambton Primary School, Newcastle Boys High School, The Royal Australian Naval College, The University of New South Wales and the Royal Naval Engineering College; … and for Marvin at Cooke Point Primary School, Hedland Senior High ’ School, St Peters Lutheran College, The University of Central Queensland and The Australian Graduate School of Management; These teachers collectively engendered in us a love and respect for both the science of mathematics and the art of communicating with the written word. Foreword from a Business Leader BRIANHARTZER ffi ManagingDirectorandChiefExecutiveO cer WestpacBankingCorporation Oneofthemostfundamentalquestionsthatconfrontsanewmanagementteam ‘ ’ ‘ – is whatisourjob? Or,saidanotherway, whatareweheretodo onwhatbasis ’ shouldoursuccessbemeasured? ’ It s a critical issue to confront because management teams in our hyper-scrutinised, globally-connected world are inundated with compe- ting priorities and challenges from a large number of stakeholder groups. Retail shareholders, institutional investors, regulators, politicians, labour unions, social and environmental activists, management consul- tants, journalists, social media bloggers, governance and proxy advisors, equity and debt analysts, rating agencies, and of course customers and – fl consumer advocates each constituency has its own (often con icting) views of what the management team should focus on, and how they should make their choices. Without a clear sense of purpose, management teams risk slipping into ff a reactive mindset where their agenda is e ectively set by others. Or, where in trying to balance the interests of multiple stakeholders, they pursue so many competing priorities that they risk achieving none of them. ’ Intodays marketwhereeveryindustryisfacedwiththepotentiallydisruptive impactsofnewtechnologyandbusinessmodels,thepotentialconsequencesfor companies (and their leaders) of such a slip are dire. Meanwhile, many ix x ForewordfromaBusinessLeader companieshavelearnedthehardwaythatasingle-mindedfocusonimproving fi – – pro tability and shareholder value to the exclusion of everything else can leadtoequallydireconsequencesintheformofmarketsharelosses,class-action fi lawsuits, regulatory nes and increased oversight, or permanent reputational damage. AsaseniorexecutiveatmajorbanksinbothAustraliaandtheUK,andbefore fi fi ’ thatasaconsultantto nancialservices rmsonfourcontinents,Ivewatched up closeasCEOs and management teams have grappledwith thesechallenges – overseveraldecades particularlyduringandaftertheGlobalFinancialCrisis. ‘ ’ AsIapproachedbecomingCEOmyself,thequestionof wheretofocus tookon arenewedandverypersonalimportanceforme. In my case, the challenge waseven more important as, duringmy tenure as CEO, Westpac would celebrate its 200th anniversary. As Australia’s oldest fi company and rst bank, we have a proud history of supporting the economic ’ ‘ growthofAustralia.So,itsnotsurprisingthat whatdoyouwantyourlegacyto ’ be? hasbeenoneofthemostfrequentquestionsIgetasked. As the current stewards of the Westpac Group, our management team fi ’ bene ts from the companys long history of recognising its higher purpose of ’ supportingAustraliaseconomicgrowth,andofitsbroaderroleinthecommu- ’ ’ nity.Indeed,wevebeenrecognisedastheworldsmostsustainablebankbythe Dow Jones Sustainability index for the last three years. We summarise this purposeinourmissionstatement: ’ Tobeoneoftheworldsgreatservicecompanies,helpingourcustomers,commu- nities,andpeopletoprosperandgrow. ’ Its a statement which recognises that, in doing our job well, we have an ‘ ’ importantroletoplayincreating value foreachoftheseconstituencies. fi Nevertheless, the pressures for strong absolute and relative nancial perfor- – mance are relentless as they should be, given the relative size of our market capitalisation and thus the relatively high weighting of our stock in most ’ Australians portfolios (whether held directly,orindirectly through their supe- rannuationfunds). AlongwithourBoard,weasamanagementteamhavespentmanyhours ’ debating the issue of priorities, and how to reconcile stakeholders compe- tingdemands.So,itwasserendipitousthataroundthetimeofthesediscus- sions The Legacy of Good Leadership arrived on my desk and I had the good – fortunetomeetDenisKilroyandMarvinSchneider.Theirbook whichhas now been updated and enhanced for the purpose of worldwide release with – the new title Customer Value, Shareholder Wealth, Community Wellbeing gaveusaframeworktoassessourconclusions.Italsogaveusthecomfortof – knowing that our chosen strategy which was developed through ForewordfromaBusinessLeader xi fi – experience, competitive and nancial analysis, and debate lined up well fi with the more rigorous nancial and strategic models developed through their research. fi Formepersonally,theEconomicPro tBowWaveframeworkdescribedinthis bookhelpedprovidetheconceptuallogicforwhatIhadcometobelievethrough experience:thatdespitewhatmanyexecutivesandcommentatorsbelieve,there fl is no con ict between doing the right thing by customers and doing the right thingbyshareholders. Like the authors of this book, I spent my early years in management – consulting. In my case, it was at First Manhattan Consulting Group an fi early pioneer in the application of economic pro tability to the more fi fi systematic management of nancial services rms. The logic of focusing fi on shareholder value and the use of economic pro tability to drive strategy was compelling, and its simplicity as a framework was hugely appealing because it seemed to bring certainty and purpose to an other- wise chaotic business world. I continue to believe that the primary goal of management is to grow shareholder value. However, over the past twenty years, three events caused me to realise that to achieve this goal management teams need to look deeper thanacoupleofmathematicalformulas. fi ’ ’ The rst was the unwinding of Lloyds Banks incredible run of value crea- ’ tion. For years, under Brian Pitmans leadership (as described in this book) ’ Lloydswastheposter-childforacompanythatfocusedrelentlesslyon impro- fi – ving economic pro tability. Thenin the late1990s, itallstopped essentially fi their focus on short-term economic pro tability led to a complete stalling in their rate of growth. For many of us shareholder-value devotees, this was a wakeupcall. Thesecondeventwasthecollapseincustomersatisfactionamongthemajor Australianbanksinthelate1990s.Havingsurvivedanear-deathexperiencein the recession of the early 1990s, the banks had focused on restoring their fi pro tability through cutting costs, raising fees and shrinking or exiting low return-on-capital business activities. These were all good textbook shareholder ’fi valueenhancingactions,whichdramaticallyimprovedthebanks nancialand stock-marketperformance. Unfortunately, the consequences of these policies for customers were fi ffi severe, with signi cant reductions in sta ng levels, reduced opening hours, large numbers of branch closures, and higher fees. Complaints about service rose dramatically, customer satisfaction fell, and a negative media feeding-frenzy ensued with a litany of examples being brought xii ForewordfromaBusinessLeader ’ forward of bad service, and of banks putting their interests ahead of ’ their customers interests. I distinctly remember John McFarlane (then the CEO of ANZ and currently Chairman of Barclays Bank) recognising how dangerous the “ situation had become. McFarlane told his management team: This. Stops. Now. We cannot build a successful and sustainable business if our ” ff customers hate us. McFarlane subsequently kicked o an initiative known fi as Restoring Customer Faith, which led to signi cant improvements in ff – customer satisfaction, market share, and sta morale as well as in absolute and relative shareholder value. – During this same period, Westpac under the leadership (progressively) of – Bob Joss, DavidMorgan, and Gail Kelly led the wayin embracing sustaina- ‘ ’ bility as a key objective, with its famous squashed tomato annual report ‘ fi ’ ffi acknowledging candidly that juicy pro ts were insu cient if they came at the cost of stakeholder trust (a principle that continues to guide our manage- mentprioritiestoday). The third experience was working in the UK after the GFC had – decimated the British banks. At Royal Bank of Scotland (RBS) argua- – bly the biggest bank failure in history it was clear that no amount of ’ cost cutting or pricing changes was going to restore the banks economic fi ’ pro tability any time soon. In fact, I remember RBSs CEO Stephen fi ’ Hester telling the market at a quarterly brie ng that they shouldnt expect to see any dividends for the foreseeable future. And the stock price went up! ’ Hestersinsightwasthatwithouttheabilitytopaydividends,theonlywaysto increase the value of the company were: a) to reduce the uncertainty about futurelossesfrombadloans andinvestments; b) to demonstrateanimproving fi pro ttrajectory;andmostimportantlyc)toincreasethelong-termvalueofthe fi franchise.Infact,hisusualquestionwhenabusinesswasbeatingitspro ttargets was to ask whether we were over-earning and not investing enough in the franchise! Fromthese examples, it became clearthat focusing on the long-term health fi andpro tabilityofthecustomerfranchisewasinfactthemostcriticaldriverof fi long-termshareholdervalue.Doingthingsthatdroveupshort-termpro t,but ’ caused customers to leave in the longer term, was not in any companys long- terminterest. – fi Admittedly this was not a revolutionary insight the Service-Pro t Chain concept popularised in the mid-1990s by James Heskett, Thomas Jones and Gary Loveman is one example of a similar understanding. But while the logic of these arguments was compelling, for me they lacked a
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