Market Value Creation: A CFO Guide
CFOs and the finance organizations they lead can play a central role in market value creation (MVC), a term for a range of initiatives incorporating an organization’s strategy and performance capabilities in ways that can potentially benefit its share price, its cost structure and the perceptions of internal and external stakeholders.
“CFOs are uniquely positioned to lead MVC programs, since MVC is really focused on creating enterprise-wide value for an organization by maximizing internal capabilities and providing alignment with external stakeholders,” said Rich Rorem, U.S. practice leader for Finance Transformation at Deloitte Consulting LLP, speaking during a Deloitte webcast, The CFO’s Role in Market Value Creation.
“MVC initiatives can vary from company to company depending on strategic goals and requirements, incorporating such initiatives as attracting a certain shareholder mix and managing credit ratings for some to managing stock price appreciation and minimizing enterprise cost of capital for others,” he added.
Determining an enterprise’s objectives is a challenge in part because the answer could be some or all of the above.
The CFO’s Role in Market Value Creation
An MVC framework includes four main pillars—internal capabilities, information choices, external stakeholders and external feedback—to help executives identify and understand the origin of issues and ultimately lead to ways to address them.
The first step for a CFO establishing an MVC framework is to consider a simple but often difficult question: What performance objective is the company managing toward? “CFOs need to put a laser-like focus on what they’re trying to drive in the organization, whether that’s stock price appreciation, minimizing the cost of capital, attracting a certain shareholder mix to create some stability in the equity and ownership of the enterprise, managing a credit rating or managing multiple expansion—or a combination of those,” said Chris Ruggeri, a principal at Deloitte Financial Advisory Services LLP, who also presented during the webcast.
The next step is identifying metrics and key performance indicators (KPIs) that matter most and defining how those metrics and indicators correlate to the company’s stock price. “More often than not, finance executives are so focused on running the enterprise and developing internal information to inform management decisions that they cannot easily answer the question of what drives stock price performance,” Ms. Ruggeri noted.
An organization should have an analytical framework for evaluating business decisions in the context of key performance requirements that the investment community requires. Finance should also have an open dialogue with the general counsel, who can provide guidance on limitations on the content communicated to the investment community under regulatory requirements. Communicating the MVC strategy with external stakeholders is another area where CFOs can lead. Decisions include who among senior management and other executives leading the businesses should communicate the message. “Think about the resource allocation that should be made here,” Ms. Ruggeri explained. “Companies can spend an awful lot of time with the investment community. How can you organize a program so that it is done in a fashion that is responsive to investor requirements, but at the same time, is not distracting to the management team such that they’re spending more time interacting with investors than driving the performance of the organization and creating value?”
Finally, CFOs can work with other senior executives to see that metrics and KPIs used to measure stock price performance are adopted across the organization and are part of the organization’s decision-making.
“It’s important to look at the pieces of the framework holistically,” said Nick Cirignano, a senior manager at Deloitte Financial Advisory Services LLP, who also presented on the webcast. “However, often people focus instead on strengthening internal capabilities and business partnering, or targeting certain external shareholders and trying to build those relationships, but fail to consider how one should influence the other,” he added.
Translating Strategy into Value
An MVC program can address value issues through two core components, one internal to an organization and the other external. Internally, an MVC program can help a CFO and other leaders improve strategy-setting and performance to drive intrinsic value. Externally, an MVC program can help align internal and external perspectives of a company’s value to help avoid issues such as a “value gap,” which can occur when management’s perception of a company’s intrinsic worth differs widely from perceptions of external shareholders.
A value gap can arise, for example, when company management uses a different set of performance metrics from those used by the analyst community. “Although there are several causes of value gaps, an important one to watch for is when external stakeholders have a different understanding of company strategy or lack confidence in management to ultimately execute the strategy,” said Quinby Squire, a webcast presenter and a senior manager with Deloitte Consulting LLP specializing in finance transformation.
MVC is designed to align internal intrinsic value with external perceptions to drive the strategic goals set by management and close, or even prevent, a value gap. An MVC program should also have a communication component to articulate what the organization is doing to create and maintain value to stakeholders. For example, when webcast participants were asked, “What information is the most difficult to effectively communicate to the investment community?” 21.8% of the 1,451 respondents cited “Progress against strategy” while 20.5% indicated “Forward guidance (earnings guidance),” and 15.2% answered “Rationale for performance results.” The remainder indicated “Not applicable/Do not know.”
Addressing the following questions can help executives shape their communication on value creation to shareholders and other stakeholders:
- How does the company’s business strategy translate into value?
- How does it align internal company stakeholders by coordinating strategic planning, a cohesive information strategy and relationships within the business?
- What can be done to help stakeholders understand the company’s performance relative to its peers?
- Which trends, levers and effective practices help influence relationships with the company’s stakeholders to support market value creation?
The Importance of Two-way Communications
Communication is central to driving MVC. CFOs should:
- Develop credibility across a variety of complex stakeholders: Gain the right to provide information and consistently, over time, create situations to interact with the stakeholder groups. Tailor messages to them and consistently reinforce those messages down the road. Understand stakeholders’ value objectives, how they align with the objectives of the CFO, and make sure those messages are clear.
- Create a two-way feedback loop with stakeholders: This will allow communication to be received back that can be internalized and used to drive a CFO’s own processes, procedures and metrics. The two-way feedback loop will facilitate alignment among the stakeholders, and ultimately, drive value over time.
“CFOs wear many hats,” said Ms. Ruggeri. “Partnering with the CEO and business leaders within the company, they act as architects of corporate strategy. Partnering with the businesses, they provide information analysis and insight to inform judgments in business decisions. They clearly help to drive enterprise performance and also play a central role in keeping investors and critical stakeholders informed about the company’s strategy and performance,” she added. Given the breadth of the role, CFOs should decide how to focus their attention and the organization’s resources to drive MVC.
- Deloitte Dbriefs webcast: The CFO’s Role in Market Value Creation
- How CFOs Can Close the Gap Between Management and Investor Views of Company Value
- Closing the Gap Between Management and Investor Views of Company Performance—Two Case Studies
- Investor Relations: What New CFOs Should Know