Boston Consulting Group’s 20th Annual Value Creators Report Highlights Ways That Companies Can Drive Strong and Sustainable Medium- to Long-Term TSR
BOSTON— During the ten-year bull market, companies’ share prices seemed almost to soar at will: ten years of uninterrupted economic growth and low interest rates provided strong and consistent tailwinds for shareholder value creation. As a result, some leaders may have taken the focus off of what truly builds value within a company. As market volatility and economic uncertainty come back into play, companies may need to reconsider the essence— and hard truths—of the ways that a company creates value.
Enter a new publication from Boston Consulting Group (BCG), “Ten Lessons from 20 Years of Value Creation Insights.” Based on cumulative knowledge gleaned from studying the ways that top companies created value for owners over various five-year periods dating back to 1999, the article distills what BCG has found really matters—and where management often goes wrong—when it comes to value creation.
One salient truth: medium- to long-term total shareholder return (TSR) should be a key metric for value creation in public companies. TSR is balanced and accounts for all factors that drive value: revenue growth (from reinvestment in the business), margin expansion (from cost control and pricing), and cash flows (which can be reinvested for more growth or used for other value-creating purposes).
“Substituting any proxy metric for TSR inevitably leads companies off course. When earnings per share (EPS), for instance, is the principle governing metric, managers can end up ‘buying’ increased EPS by making excessive capital expenditures, ill-advised M&A moves, or poorly timed stock buybacks,” says Alexander Roos, a BCG senior partner and coauthor of the article.
“TSR, measured over a three- to five-year period, gives strategies the chance to be implemented and investments the opportunity to mature. It is the only performance metric that appropriately scores the game. That’s why it’s the only multiperiod metric mandated by the US Securities and Exchange Commission,” says Eric Wick, a BCG senior partner and coauthor of the article.
The following are among the other important value creation lessons and truths the article brings to life:
Other value creation lessons: treating investors like customers pays dividends over time; focusing too much on metrics hinders the pursuit of value creation; and valuation multiples are no longer—and shouldn’t be seen as—an inscrutable black box.
“The proliferation of new business models in the digital age is sometimes interpreted as making value management less relevant when, in reality, the opposite is true. The use of TSR as a North Star that guides value-creating agendas and the application of the hard-won, timeless principles of value creation are more important than ever,” says Hady Farag, a BCG associate director and a coauthor of the article.
A copy of the report can be downloaded here.
To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or email@example.com.
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