Metrics and Measurement

Value Starts at the Top

12 Mar 2013  

My colleague Robert Reiss studies CEOs — especially their successes and failures — in order that others might benefit from them.  His Internet show The CEO Show produces interviews from these CEOs on leadership, and how they make their organizations ‘tick’.  His book (with Jeffrey J. Fox) The Transformative CEO (McGraw-Hill, 2012) gathers some of their stories, principles, and accomplishments.CEO Show

Robert characterizes the CEO’s primary job as getting the organization from here to there.  Whatever resources are required to do that, it’s his or her job to make sure they’re in place — fully resourced, focused, and firing on all cylinders.

Robert sensed intuitively that the CEOs he interviewed on his show were adding substantial value to their organizations.   But was what seemed subjectively true also objectively verifiable?  When Robert wanted an independent test of his hypothesis, he turned to The Knowledge Agency®.

The TKA test

TKA devised a test using a widely-accepted benchmark — the change in the stock price during their respective tenures as CEO.  But market conditions were very different over the differing time frames we tested — even staying flat in a down market like that of 2008-09 would be judged superior. To adjust for such variations, we gauged the results against the return from the overall market, as measured by the return on the S&P 500.

So our benchmark metric was stock price return in excess of the return from the S&P 500.  We tested the eleven of Robert’s ‘transformative’ public companies having market capitalizations over $1 billion.

The envelope, please

The results were astonishing.   As shown in the table, the median gain was 44 percent over the benchmark, with the range from a slight loss against the benchmark to an excess gain of more than 5400 percentage points.  These results were for periods of time ranging from 5-23 years.

CEO chart shadows

Only one company (Xerox) did not beat the market over the CEO’s tenure — and on further examination we found that in fact it did for most of that CEO’s tenure, until the sharp recession of 2008-09.

Click here to download a short article from The CEO Forum magazine based on TKA’s Transformative CEO study.

An evolving role

It’s interesting, and I think instructive, to consider how we as a society label the people who lead our economy.  When I was in business school, we typically referred to the occupants of the C-suite as ‘decision-makers’.  This positions their primary contribution as information intake, processing, and analysis — to make the decisions that others then execute.  They do so by gathering information, and analyzing it — though such analysis may consist of little more than a BOGSAT (‘bunch of guys/gals sitting around a table’).

Today most companies have at the helm someone called a CEO, a Chief Executive Officer.  Literally speaking, an ‘executive’ is a person who executes, who gets things done.  CEOs aren’t usually called on to do much direct execution themselves — though they do make sure others are getting things done.

Chief Value Officer

I’ve been thinking about how C-level people might view their responsibilities, and accordingly ‘position’ themselves among the people they lead.  Both my research experience and my personal experience leading small organizations lead me to believe that the primary concern at the top is neither decision-making nor execution — though both of these are important — but VALUE:  how it’s produced, who it’s produced for, how to produce more of it, and so on.  Nearly all of my competitive research for clients is ultimately about value — what opportunities it presents, and what threats exist to it.

Here’s how I put it in my commentary section of the Transformative CEO research findings:

The CEO is really the ‘Chief Value Officer’ of an enterprise.  It’s a big part of his or her job to:

  • set and monitor strategic value goals,
  • ensure that opportunities for value are maximized, and
  • ensure that threats to value are minimized and/or mitigated.

For a traded company, there is no more powerful and representative single measure of success in this regard than the stock price. It’s what Wall Street analysts forecast, it’s what the financial media report, and it’s what we as shareholders look to in deciding how to ‘vote’ with our dollars.

The value goal

Producing economic value is the ultimate goal of any business organization, and non-business organizations likewise have their own specific definitions of value.  But however defined, value is the GOAL or RESULT of economic activity — whether measured by sales, profits, cash flow, share price or whatever other metric is agreed upon with stakeholders.

OK, but does this really matter — or are we just splitting semantic hairs?  I think it does matter, and here’s why.  In doing competitive analysis for a couple of decades, I’ve noticed that where many organizations fall short is in defining their ‘competition’ too narrowly.  I termed this competitive myopia in a previous post.  Apparently it struck a note with some of you, since it quickly became my most-read post here.

Focusing more on the value we add to customers is a more productive foundation for building a competitive strategy than is a ‘beat those guys’ mentality.  Customers — not rivals — are who pay for us to do what we do.  And our real (hidden) competitor is often not the other guy, but ‘no sale’ or an internal client resource.

Think for a minute about your own value proposition.  Are you creating as much value as you could?  Are you missing opportunities to create even greater value?  Are you sufficiently attuned to threats to value that could be developing in the future?

Robert featured our research in his Forbes column.

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