The Hindu Business Line : See a `V' in value

IQ is intelligence quotient, EQ is emergency quota for the must-travel types, DQ is a computer magazine, and HQ is headquarters. So, what is VQ? A new tool called value quotient from Peter S. Cohan, who tells all in his new book Value Leadership from Wiley.

His 2002 stock picks gained 81 per cent when the S&P 500 plunged 24 per cent, and now he shares his `expertise in understanding shareholder value', and the `seven management principles that were tested in periods of economic expansion and contraction'. For this he draws examples from eight `value leaders', the companies that `grew 35 per cent faster' through two recessions, and were `109 per cent more profitable and generated five times more shareholder wealth than their peers'. A sampler:

Value leadership differs from management ideas such as reengineering, Six Sigma, the balanced scorecard, and economic value added (EVA). Although these techniques seek to improve profits through quantitative or engineering analyses, value leadership seeks to enhance how a company behaves relative to its employees, customers, and communities. And VQ (a percentage between 0 and 100) is based on specific evidence of how closely a company's actions follow the principles of value leadership. A measure that would be useful to investors.

Frugal experimentation is an integral component of value leadership. It allows executives to try many possible avenues for growth without spending too much money on dead ends. Unworkable ideas get killed before the company spends too much money.

One of the greatest challenges facing successful companies is the saturation of their core markets. When a big company has satisfied most of the demand among the consumer group it originally set out to serve, its very success constrains its ability to grow in that market.

Some companies respond to this challenge by sticking with their core customers and products — a recipe for stagnation. Others attempt to acquire their way into what appear to be new fast-growing markets, only to discover that they overpaid and lack the skills needed to compete effectively. Both of these approaches reflect intellectual sluggishness born of complacency.

Investors should seek out companies that best satisfy the quantitative indicators used to select value leaders. These are: market share, ten-year average return on equity, revenues and profits per employee, balance-sheet strength, ten-year earnings growth, and ten-year shareholder return.

And there are five qualitative factors: quality of financial reporting and shareholder communications, absence of significant legal matters and contingencies, a high degree of employee satisfaction, excellence in customer service, and high level of peer respect.

To value human relationships, an organisation must perform four activities well: (i) Commit to core values; (ii) Hire for values; (iii) Balance performance measurement ; and (iv) Reward employees intelligently .

Given the complexity of accrual accounting procedures and the incentives to abuse them, investors have very little reason to trust reported numbers.

Value leaders tend toward conservatism in their accounting, whereas some peer companies may go over the line to make their financial results look better than their economic fundamentals would suggest.

Follow the value leader, to add value to your stock.

BookValue@TheHindu.co.in

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