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May 30, 2018

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Shareholder vs Stakeholder Value Revisited - Microsoft & Ricult

April 17, 2018

I've just returned from the most wonderful holiday in Japan! On top of glorious food, cultural experiences and adventures in nature, traveling also means more time for books and podcasts. I would like to highlight a podcast I listened to that gave me some food for thought: Microsoft's Next Act by the McKinsey Podcast, which featured an interview with Microsoft CEO Satya Nadella, who is widely respected for rejuvenating the company - an indication of which is its more than doubling (+147%) in share price since his appointment in 2014, outperforming Apple (+117%) and Nasdaq 100 (+76%). Looking more closely into this rejuvenation helps shed light on the evolving image and responsibilities of companies, both commercial and social. 

 

>> Improving stakeholder focus is a key element of the Microsoft turnaround

 

In the interview, Nadella attributes a key part of the rejuvenation to the broadening of performance management, clearly separating near term "performance metrics" and longer term "power metrics" - which are "leading indicators of future success and are more about usage and customer love or satisfaction". Both these current-year and future-years performance projections then form the basis of executive scorecards.

 

By incorporating the long view, having empathy for customer and workforce satisfaction, and broadening data monitoring to improve accountability, Nadella is clearly driven by stakeholder concerns that go beyond the near-term share price - yet what we have seen is that this pays off in shareholder returns. Extending their efforts in Cloud enabled a pivot to subscription-based sales, catalyzing a dramatic re-rating in valuation multiple but also leading to more engaging, proactive work for its engineers as ongoing design improvements became much more interactive. A more customer-friendly mindset enabled them to design the Surface, widely touted as the only real contender to MacBook in years. 

 

This is interesting in the midst of the often repeated "rally cry" of sorts in impact investing presentations, which pushes for an end to the “reign” of shareholder value maximisation, replacing this with stakeholdervalue maximization – tying companies to their full economic impact beyond financial profits, and addressing their implicit responsibilities to employees, customers, suppliers, partners, and even the wider society and environment as a whole.But the end goal is probably not a replacement, but further collaboration.

 

>> Why has shareholder value maximization been the norm since 1980s?

 

The potential for incentives misalignment and the resulting risk on longer-term growth have been routinely highlighted over the past decades (!) by high profile leaders such as Michael Porter (’92) and Jack Welch (’09). So perhaps the more relevant question to ask is: why has this concept stuck around for so long? 

 

Value maximization came about as a way to focus managers. With the creation of a singular, all-encompassing goal, this adds visibility and accountability. And even after accounting for the well-flagged issues with unrealistic assumptions, it still appeals in theory: a well-run company offering a desired product to society in an open, competitive market delivers social value, which would be rewarded and therefore generates value to shareholders.

 

This simplicity is also a double-edged sword. If the main appeal is with focus, which singular metric could most appropriately capture shareholder value? The use of share price or earnings per share as common proxies lie in the fact that they are so transparent and easy to understand. Tweaking further would involve even more assumption definitions. For example, even if we all accept discounted cashflows as the gold standard for fundamental company valuation, how many years can/should one make projections for, whilst maintaining reasonable accuracy?

 

>> Better data accessibility is breaking down constraints

 

The huge leap in data accessibility in quality may be an answer. Companies now have cheaper, more effective ways of getting higher quality data. This vastly expands the quantitative toolkit available for monitoring progress, projecting future cashflows, and therefore measuring shareholder value – across each and every layer of stakeholders.

 

This presents exciting opportunities for creative solutions in corporate strategy design. For example, I met Aukrit Unahalekhaka, co-founder & Thailand CEO at Ricult, at a social venture competition recently (they won that one, and many more). Ricult provides a digital platform for farmers, driving productivity improvement through soil testing, crop sciences and data analytics; more importantly, they also enable independent farmers access to markets and credit using the data they now own. 

 

So far, this business proposition is exciting, but not necessarily unique. The lowering cost of drones, improving monitoring technologies and the huge agricultural population in Asia means that many agri-tech companies have propped up in recent years, and have formed a mainstay of impact investment transactions. Even within my first year of research into the space, this is the 3rdcompany offering the similar end solution to the farmer – but Ricult is by far the most successful. 

 

What sets Ricult apart is their holistic solution for stakeholders – crucially, including the local government. By winning support and partnership with the public sector, this vastly improved Ricult’s own access into the rural community, thereby broadening the reach of their technology. This early decision, and the uncompromising focus on their social impact, sets it apart from other agri-tech plays that emphasise the technology, but overlook infrastructure and their ability to yield systemic change.

 

The ability to recognize the power of data, and how this can be incorporated into bridging the gap between stakeholder groups – of which shareholders are one – may prove to become the standard for business development.  

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