When an organization’s senior leaders have a strong financial compass. It’s easier for them to resist the siren songs of financial engineering, excessive force. The idea (common during boom times) that somehow the established rules of economics no longer apply. Misconceptions like these which can lead companies to make value-destroying decisions. Also, slow down entire economies—take hold with surprising and disturbing ease.
The Four Values Principles
What we hope to do in this article is show how four principles, or cornerstones, can help senior executives and board members make some of their most important decisions. The four cornerstones are disarmingly simple:
- The core-of-value principle establishes that value creation is a function of returns on capital and growth. While highlighting some important subtleties associated with applying these concepts.
- The conservation-of-value principle says that it doesn’t matter how you slice the financial pie with financial engineering, share repurchases, or acquisitions; only improving cash flows will create value.
- The expectations treadmill principle explains how movements in a company’s share price. How it reflects changes in the stock market’s expectations about performance. Not just the company’s actual performance. The higher those expectations. The better that company must perform just to keep up.
- The best-owner principle states that no business has an inherent value in and of itself. It has a different value to different owners or potential owners—a value based on how they manage it and what strategy they pursue.
Obvious as this seems in hindsight, a great many smart people missed it at the time. And the same thing happens every day in executive suites and boardrooms as managers. Moreover, company directors evaluate acquisitions, divestitures, projects, and executive bonus. As we’ll see, the four cornerstones of finance provide a perennially stable frame of reference for managerial decisions like these.
Applying the four cornerstones of finance sometimes means going against the crowd. It means accepting that there are no free lunches. It means relying on data, thoughtful analysis, and a deep understanding of the competitive dynamics of an industry. None of this is easy, but the payoff the creation of value for a company’s stakeholders. Also. for society at large—is enormous.
After a decade of immense study in this field, I have chosen to contribute as an entrepreneur with a wealth of experience across industries and market segments by helping through blogs. I have a proven record of building e-commerce platforms and a ready network of marketing and sales channels to reach a large audience. Moreover, I take a pragmatically unconventional approach towards describing how making small modifications in a person thinking, can yield massive results in their day-to-day lives.