A View From INSEAD
Business Value Creation and Business Decisions
Professor Kevin Kaiser
Professor Kevin Kaiser
Programme Director of the Transition to General Management programme
Professor Kevin Kaiser has been teaching the topic of value creation since the 90s – since his time at McKinsey.
Fifteen years later and we are living in a world of continuing global financial crises, because, as Kevin says; “huge amounts of value was destroyed over many, many years – and keeping up the value destruction became unsustainable.”
So how do we get the world to stop destroying value?
“We need to stop managing for the Key Performance Indicators. KPIs are there to help us learn about whether we’re managing our value or not. They are not value. I can easily deliver profit in a given year, in a way that destroys long-term value – and if you pay me to do it, I’m going to do it, because at the end of the day; I want a new swimming pool, I want to upgrade my kitchen – I want my bonus, and more importantly I don’t want to be fired. So if you’re paying me to blow-up the company, but deliver the short-term targets while I do it? We do that. So how do you stop people? You need to teach the guys who are at the top – what value is.”
How do you get to the guys at the top?
“The plan isn’t to teach a few junior guys how to do a valuation. The plan is to get to the CEOs – through those junior guys. So communication is a key objective. To provide conceptual frameworks to ensure these lessons can trickle up to the top when a participant is back in their organisation. If they can’t communicate it effectively to the guys above, to use in decision-making, then there’s no point. I want to give them the skills, but also the communication ability – to explain why they’ve done what they’ve done in a way that decision-makers actually use it.”
In Kaiser’s ‘blue-line management’ every decision and resource allocation is taken with one aim: to create value. This is as opposed to red-line or ‘indicator-driven’ management, where short-term KPI results can be gotten at the expense or destruction of long-term value. For an organisation to achieve that financial strategy cannot be the sole preserve of the finance function within an organisation. There needs to be a joined-up, holistic approach to finance where each department is managed through the prism of value creation.
“Finance people have the toolkit – but they have to work with the people who understand the business; which means the marketing people who understand the customers, the operations people who understand the supply chain and inventory management, and with procurement who work on relationships with suppliers – everybody in the business has to work as a team.”
“Finance guys can understand the mechanics of value and value creation – but the other guys are the guys who fundamentally make the decisions. It’s how to combine it and how to get the two sides to talk clearly – and to share, and to work together, in order to do it. And this is what I try to teach.”
In order to achieve that through executive education; is the aim to develop financiers more horizontally, or to develop leaders more financially?
“Finance functions inside most companies are composed of a lot of accountants. Accountants don’t understand what I’m talking about at all. What they’re taught is how to document the past in a way that’s consistent with reporting standards and compliance standards. You need to actually have finance people, who aren’t accountants – who understand finance and the role of finance, helping decision-making by the business leaders. So that’s the horizontal.
Second, you need business leadership who appreciate that they need to understand finance first, before they learn other things. The mistake we often make is we give leaders skills; communication skills, leadership skills, personal skills – which make them more effective in getting people to follow them, but without giving them an understanding of value and value creation – and the finance skills to decide it, and to know it. The result is they lead their company very successfully straight down the toilet.”
On learning the mechanics of a precise valuation – for a merger, an acquisition, or indeed, to assess the value of any business decision – Kaiser added this:
“You can’t predict the future – but if you understand the underlying probabilities, you have a reasonable idea of what’s expected.
By understanding the world very well, by understanding the industry, the competitive landscape, the technology, your customer’s preferences, the supply chain, the different processes at work in your company – and in other companies – the better you understand – finally – what is expected. Within a range. By the time you’ve finished, you don’t have the answer – but you have a narrow range.”
Perhaps more important still is the rigorous development of a deeper understanding of value creation – the Whys. That deeper understanding arms the financial executive with the powers of communication and persuasion necessary to have these ideas take root from the top-down in an organisation and achieve real culture change (“To talk clearly – and to share, and to work together.”) This, we know, is where many other executive education interventions fail.
“At the end of it, if you understand the value impact of your decisions then you’ll be in a much better position to make those decisions. Not as a finance person, but as a business person.”
And if you needed any more persuasion on the importance of value creation - then here it is:
“There is a value imperative in the world, which is whether you or I like it or not, you will create value as a legal entity – or you will be shut down. And so when I define: what is value creation? - separate from how we measure it – value creation is what you need to be doing in order to have a reasonable chance of still being here a hundred years from now. That’s the definition.”