The quest for achieving corporate success on one hand and creation of maximum value for the company on the other continues. The corporation representing the group of the stakeholders, the answers lie in identifying the choice of the stakeholders who ultimately are the decision makers.
The stakeholders in a company can be broadly categorised into six namely, the shareholders, the management, the employees, the community, the suppliers and the customers. The different groups of stakeholders have to be kept happy so that the corporation is able to achieve its aims and maximise success in its ventures. A company that would be successful is one that is able to keep all the stakeholders happy.
Shareholders
The shareholders form a major chunk of the stakeholders and come first in terms of priority, as they are the group that provides the company with the required capital. They are the reason for the existence of the company that can in turn achieve the aims of the business. Since the 1950s the shareholders have been identified as a group of prime stakeholders and maximising the value provided to the shareholder is very important for the business.
Many organisations believe that the shareholders are the only driving force but considering a long-term situation this does not hold true. The task of maximising the shareholders value is rather simple but the financial variables involved in the same is not so. There are in all ten financial drivers, which have to be considered.
These ten financial drivers play an important role in maximising the shareholders value and therefore play a dominant role. The ten financial drivers can be listed as:
- Growth in the cash flow
- Growth in earnings
- Variance of Earnings
- Variance of cash flow
- The operating margin
- Return on Equity
- Dividend Payout Ratio
- Z-score
- Long term debt to equity ratio
- The growth of sales
A company that is successful financially will show excellent results as regards each of these ten financial drivers. The company should also have the best earnings on the total return to the shareholders considering a period of five years. An analysis where the returns of the company are compared with that of its peers would be the best way to know the performance of the company.
The company that is successful would stand out having the below mentioned differences:
- One standard deviation below the mean: variance of cash flow and variance of earnings.
- One standard deviation above the mean: growth in cash flow, growth in earnings, operating margin, return on equity, growth in sales, and an enhanced Z-Score.
- Within one standard deviation or above the mean: dividend payout ratio.
- Within one standard deviation or below the mean: long-term debt to equity.
For each financial variable a mean or the average value is calculated, the standard deviation or how much the value would actually deviate from the mean, a variance that is calculated by squaring the standard deviation. These calculations help in making comparisons and knowing the difference in performance of the company in comparison to its peers in the industry.
The Z-score model given by Edward Altman is a model that helps in the prediction of bankruptcy. It is useful in making calculations and determining the financial status of a company.
Employees
The employees are the most important assets of a company who actually help in realizing the business goals of the firm. Many companies fail to recognize the importance of this asset. It is very important that the employees of the organization are kept motivated and that they feel a sense of belongingness to the firm only then would the firm prosper and be able to achieve success in its ventures.
This would create a feeling of working for the benefit of the company whatever be the circumstances. With the competitive atmosphere in today’s world it becomes very important to have a task force that is totally sincere and committed.
Many organizations feel that employee empowerment can be implemented by following a system that is not rigid in terms of the structure but this alone is not enough the culture within the company should be very good, communication should be free and many other aspects together make for a great organization wherein the employee feels empowered.
This can be best analyzed with things like do the employees in the organisation just feel that it is a job or do they feel a sense of belonging to the organisation. Empowered employees would want to improve their performance and thus would be beneficial in this fast changing competitive world. This would be a winning factor helping the company to achieve its business goals.
The strategy of the company must keep pace with the global competitive atmosphere and must be reviewed from time to time in order to achieve its corporate goals. For achieving the corporate goals it is important that the culture of the organisation should be active and should have effective leadership.
Leadership/ Management
The top management of the company, which leads the rest of the organization, plays a very important role. The top management must consider all the different aspects of the organisation and encourage an atmosphere of efficient performance within the organisation.
Warren Buffett known to be the best investor and a noted business analyst of America has laid down three important criteria for evaluating the top management of the organisation. The criteria are:
- Firstly, it should be evaluated as to whether the top management is rational or not
- Whether the management is forthright with the stakeholders
- Whether the management considers the importance of the institution or not
The first thing that the top management must ensure is effective allocation of the capital of the organisation. Every company has a life cycle and it is very important that the top management recognizes the stage at which the company is. The top management must be truthful regarding the operation and management of the company.
A former executive with Time Warner, John Farrand, lays down yet another tenet or principle on the basis of which the top management can be evaluated. This tenet refers to evaluating if the top management aims at success, whether its actions are focused or otherwise. Corporate history offers enough evidence of very successful companies that have fallen from the pedestal due to its losing focus and deviating from its path.
The top management failing to understand the competitive global environment and the impact that it has on the company and its products can be the sole reason which could lead to the downfall of the company.
Thus, enlightened leadership must understand the complex issue of running a business and should forever evaluate its efforts and keep making the required changes to sustain in this ever-changing world.
Customers
After the employees of the organisations the second most important assets of an organisation is, its customers. Customer satisfaction is very important for the success of the organisation. The standard for customer satisfaction, laid down by the American Customer Satisfaction Index. But this is just a standard and when it comes to satisfying each and every customer then it would definitely vary, as each and every customer is unique.
The drivers of customer satisfaction would vary from customer to customer, as each customer is different.
The analysis also known as Importance Performance Analysis involves a study or analysis of the relationship between the varied factors or elements involved for each customer set. This process involves three important steps namely:
- Carry out a standardized customer satisfaction research
- The data that is collected through such survey supplemented by discussion with individual customers would help in identifying the potential or prospective drivers.
- The third and final step involves a survey for finding out details for driver satisfaction.
The results of the survey can be used to formulate a Customer Key Driver Chart. This involves plotting details on a graph with the “x” and “y” axis. The X-axis is used to plot the individual drivers (as per the company’s performance) and the Y-axis is used to plot its importance in terms of customer satisfaction. There are 4 quadrants in the chart with the lower left hand corner being the most significant. This quadrant helps to analyze the action that needs to be taken on the part of the company.
The example given below explains the concept studied so far:
Supplier Drivers
The supplier is yet another stakeholder whose satisfaction is very important for the business to achieve its goals. Many studies do not include this stakeholder but this group is also very important for the business to achieve its goals. The satisfaction of the supplier drivers is essential for success of the business.
For the business it is very important to get the materials required to meet its requirements. The materials must not only be received on time it should also meet the required quality standards so as to satisfy the expectations and requirements of the customers and thus, improve the profits of the company. Thus, a Supplier key Driver Chart plays a very important role and meeting the requirements of the suppliers is very important for the business.
The Community
A business cannot exist on its own. It belongs to the community where it is located and must contribute to the social community as well. There are several ways in which the business can actively contribute to its community, the most important being through its employees. The employees of the organisation must be motivated to become members of the organisations in the local community and be an active member there.
The organization must then step in to support these organisations of which their employees are a member.
Contributing approximately 5% of the salary by every employee and an equal contribution by the organisation would be a great way to contribute to the community in which the business is operating and making profits. Thus, both the employee and the organisation make a positive contribution to its community.
The organization must also be socially aware and not in no way must it damage the community where it is operating. The business has a responsibility to the community to carry out all its activities in a socially responsible manner. The business must be fair and morally correct in all its activities. However this trend is slowly becoming extinct.
A Case Study
A case study of the largest natural and organic food grocer in the Us –Whole Foods can be studied for this. The company owns 166 outlets in 29 different states and also in the United Kingdom and Canada. The stores operate under different names like Whole Foods Markets, Bread & Circus, Fresh & Wild, and Harry’s Farmers Markets, Inc.
The various outlets average approximately 31,500 square feet in terms of area and have strength of 31,500 employees. The returns recorded by the company for the fiscal year 2005 were $4.7 billion in respect of sales and a net income of $163.7 million.
The company figures in the 100 Best Companies to Work for 2006 and that is why it was decide to choose it for the study. The company ranked 15th which is very encouraging as the year 2006 saw it at the 30th position. Therefore, we can consider that the company was successful in achieving empowerment of employees.
A visit to the company’s website shows that empowerment of its employees, social responsibility, understanding the requirements of its employees and knowing its workforce in terms of their talent and intelligence are important issues for the company.
The website makes it clear as to how important the employees of an organisation are for the success of the company.
The next step would be to evaluate the company’s perspective as regards the other important stakeholders like the customer, suppliers and also the community. The site provides enough information regarding the importance of customer satisfaction to the company like meeting the high quality standards, creating awareness among the consumers, providing value for money, innovations in retailing and an atmosphere that creates a positive effect.
The website also states that the suppliers and the trading partners of the company treat its customers with lot of respect and also expect the same treatment in return.
Shareholder
The shareholder is also taken care of well by the company. The company aims at creating wealth for the shareholder by increasing profits and growth for the company. The company aims at increasing the value to the shareholder, the profits are important for the growth and prosperity of the company.
The Financial Aspect
For understanding the financial position of the company and how much it meets its financial goals, the best thing to do would be to have analyzed the company’s financial results in comparison to its peers. Whole Foods comes under the category of a large cap stock and there only three other stocks that fit in this category namely, Kroger, Albertson’s and Safeway.
A study for the time period 1998-2005 was conducted and the results yielded showed the following results:
| 1. One standard deviation above the mean in earnings per share growth. | WF was well in excess, approaching almost two standard deviations above the mean. (Eight-year trend) |
| 2. One standard deviation below the mean in earnings per share variance. | WF fell extremely close to one standard deviation, but the company remained within one standard deviation below the mean. (Eight-year trend) |
| 3. One standard deviation above the mean in cash flow growth. | WF was over three times the standard deviation above the mean. (Eight-year tend) |
| 4. One standard deviation below the mean in cash flow variance. | WF was below the mean but within one standard deviation of the mean. (Eight-year trend) |
| 5. One standard deviation above the mean in operating margin. | WF was well above the mean and well above multiple standard deviations. (Eight-year trend) |
| 6. One standard deviation above the mean of the return on equity. | WF did not perform well on its return on equity. In fact, it did not achieve the mean, let alone be one standard deviation above. (Latest annual) |
| 7. Within one or more standard deviations of the mean in dividend payout. | WF fell within one standard deviation. (Latest annual) |
| 8. Within one or less standard deviations of the mean in long-term debt to equity. | WF has virtually no long-term debt. As a result, it is multiple standard deviations below the mean. In fact, the debt ratio is so low that the form of financing is significantly different than that of its peer group. (Latest annual) |
| 9. One standard deviation above the mean in sales growth. | WF had a growth rate in sales well above the mean and standard deviation. Indeed, the company’s growth was multiple standard deviations above the peer group. (Eight-year trend) |
| 10. One standard deviation above the mean for the Z Score. | WF Z-Score was above the mean and one standard deviation. The trend of this financial statistic was impressive compared to the competition. (Five-year trend) |
When we analyze the above performance it is evident that the company has recorded excellent results and although it did not manage to record a perfect score, it got a score of 80%. The company – Whole Foods’ is way above its peers.
The return on equity of the company was the only thing that was a little disappointing, which probably is due to the company using less of long-tem debt options. In case the company increases the amount of long-term debt instead of using equity for the purpose of financing its capital assets it would result in enhancing the return on equity of the company.
Compensation
Another important factor in this is executive compensation. The company Whole Foods’ has a balanced policy as regards executive compensation; it is neither too high nor too low. The policy adopted by the company Whole Foods keeps a check on the executive compensation by seeing to it that none of the executives earn an income higher than 14 tomes of the average salary of an employee.
John Mackey, the Chairman and CEO of the company earned an income of $342,000 last year. In comparison in the other companies the executives earn as much as or even more than 200 times the average salary of the employee. This is yet another feather in the cap of the organization.
Appraisal
Whole Food also was way ahead as regards its stock market performance. It recorded a five year total annual return of 38.9% with a beta of .72 as compared to its peers which recorded -7.2% and a beta of 0.72.The performance of the company has been very good thus, at the stock market too.