Forget the share price and concentrate on managing the business. As global markets, and the technology sector in particular, struggle to turn themselves around, senior executives need to remember that they are employed to operate their companies profitably, to deliver meaningful returns on equity to investors, and not to play the stock market.
The bull market of the late 1990s is well and truly behind us, but I am still amazed at the number of senior players I come across whose main topic of conversation is their company`s share price. Within seconds, they are also guaranteed to be complaining about the fact that their share options are underwater. It`s as if this is their sole purpose on the corporate planet. Well, it`s not and it`s time they caught a wake up.
The share price will take care of itself if the business is flying.
Richard Firth, Chairman and CEO, MIP Holdings.
The share price will take care of itself if the business is flying. But to achieve that requires not only close focus, but also a very clear understanding of how the particular business operates and which levers to pull to generate the most effect. The numbers are there to tell a story, but how many executives can read that story and truly understand which numbers are the magic ones for their operation?
Time and again, you`ll hear people singing the sales mantra: sales, sales, and more sales. But at what cost? What do the margins look like? You can increase sales ad infinitum, but if your margins are eroding as you do so, you run the risk of destroying the business. Examine some of the big mergers in the US and you`ll find erosion of key margins at the heart of the problem. Unfortunately, adding two sets of declining numbers together doesn`t often cure the problem - it just gives you a bigger headache!
Quality vs quantity
An improvement in gross margin has an almost magical effect on the bottom line. In many instances, an additional single point of GP can result in two points of operating profit. That`s why quality of sale is as important as quantity of sale - something that many South African IT executives seem blissfully unaware of, judging by the way commission is paid.
The average IT salesman in this country is paid purely on the amount of sales brought in, not on the overall addition of value to the profit base. Start tracking the numbers this way and you can quickly pick up return on sales and return on equity. These are the true measures - not the share price. The share price should be no more than a reflection of how well management is performing in these areas.
There is little doubt that a large number of key executives have missed the point. They believe that the higher the share price, the better they look. This is also why there has been so much accounting mispractice in this sector which is sailing close to the wind, to put it politely. Chief executives wanted to grow the asset base, to increase the size of the company. The bigger the company, the bigger the share and the bigger their rewards, which is very different from being rewarded on the value of the rands and cents actually generated by the company.
A basic knowledge of business also needs to be cascaded throughout organisations. Not every staff member needs an accounting degree, but senior executives should be obliged to talk to members of their teams about a basic set of business numbers, the numbers that are going to keep them in jobs. Neither the principles nor the mathematics involved are complicated - and people catch on quickly.
Hire a driver and you expect him to have a licence and to be able to drive a car. A programmer is expected to be able to write code. If not, we give them these skills. So why, when we bring people into business, do we not equip them to understand how the business operates? People have to know how to do their jobs effectively.
It may be old-fashioned but at the heart of all business is a set of assets. The key question is "how are those assets being managed and what returns are being generated?" Chase growth, share price, or whatever - but if you take your eye off the return on assets, you might just as well be playing the Lotto.
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