In Value Leadership, renowned management and investment expert Peter Cohan — whose 2002 stock picks gained 81percent when the S&P 500 plunged 24 percent— provides a new and powerful concept of sustainable corporate value. Using his expertise in understanding shareholder value, Cohan offers executives seven management principles that were tested in periods of economic expansion and contraction. These principles are: valuing human relationships, fostering teamwork, experimenting frugally, fulfilling your commitments, fighting complacency, winning through multiple means, and giving to your community. Cohan illustrates these principles by drawing on examples from eight Value Leaders— Synopsys, WalMart, Goldman Sachs, MBNA, Johnson & Johnson, J. M. Smucker, Southwest Airlines, and Microsoft. Through two recessions, these companies grew 35 percent faster, were 109 percent more profitable, and generated five times more shareholder wealth than their peers.
About the Author
Peter S. Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He has written seven books, including The Technology Leaders (Jossey-Bass, 1997), which was selected as one of the ten best management books of 1997 by Management General, and Net Profit (Jossey-Bass, 2001), which the Washington Post called "A savvy, discriminating guide to Internet business." He has appeared on Good Morning America, CNN, and CNBC and has been quoted in the New York Times,Time,Fortune,and Business Week. Cohan is also an executive-in-residence at Babson College in Wellesley, Massachusetts.
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The 7 Principles that Drive Corporate Value in Any Economy
By Peter S. Cohan
John Wiley & Sons
Copyright © 2003
Peter S. Cohan
All right reserved.
Where Do You Stand?
(Start with the Value Quotient)
Value Leadership is a beacon that executives can use
to navigate their companies in the often turbulent waters of business.
Chapter One offers a tool, the Value Quotient (VQ), that can help a
company maintain its heading on that beacon by helping executives
assess how well their company follows the concept of Value Leadership.
To achieve this the remainder of this chapter answers the following
questions: How does the VQ work? Why is the VQ useful? How
can the VQ help your business?
HOW DOES THE VQ WORK?
The VQ transforms an abstraction into specific actions that one can
measure and thus quantify. The VQ is based on four levels of analysis:
concept, principles, activities, and tactics. The concept of Value
Leadership is supported by seven principles (for example, "Value
human relationships") that prescribe the way an organization should
put value into practice. Each of the seven principles has three to four
activities (such as "Adhere to core values") that broadly helpan
executive realize the principle. Each activity has between five and eight
tactics (such as "Define core values") or specific action steps that managers
and their employees take to incorporate these activities into the
company's daily work.
I based these four levels of analysis on comparing the Value Leaders
with their peers as well as my observations from twenty-two years
as a management consultant. In many companies change flows from
the top down. If the CEO is intrigued by a new concept, there is often
a danger that the benefits the CEO expects to flow from the new concept
will be blocked by the perceived costs of changing the organization.
By focusing on four levels of analysis, I hope that executives will
see clearly the full costs-and benefits-of adopting Value Leadership
before initiating its adoption.
The four levels of analysis are intended to infuse Value Leadership
with meaning by converting it into an organization's daily actions. To
do so the concept is made up of principles. The principles help executives
and managers communicate values to a company's shareholders,
employees, customers, and communities. To translate the
principles into daily action are specific activities. The activities are outwardly
focused processes that generally require the cooperation of
workers in different departments. I developed the activities by analyzing
how Value Leaders conduct their business to realize each of the
principles. To incorporate these activities into employee's daily efforts,
I have disaggregated them into tactics. The tactics are specific action
steps assigned to particular workers who agree to complete specific
deliverables by deadlines. By articulating these four levels of analysis
up front, we provide executives tools for better assessing whether the
benefits of adopting Value Leadership outweigh its costs.
As we will see, the VQ is calculated by adding up the scores for the
activities and tactics. Later in this chapter, we will discuss how you can
estimate your company's VQ at the activity level. Although calculating
the VQ at the activity level is less precise, executives can generate
useful results relatively quickly. An activity-level analysis can help the
executive identify which Value Leadership principles the company
does well and which it needs to improve. Should the executive subsequently
focus attention on improving the company's performance of
these principles, he or she should calculate the VQ at the more
detailed, tactic level. Chapters Two through Eight provide worksheets
for the tactic-level VQ analysis.
WHY IS THE VQ USEFUL?
The VQ is useful because it melds two critical perspectives on business
that are often pursued independently. Management consultants
help executives improve corporate performance by evaluating issues
of strategy, organization, and operations. Financial analysts evaluate
companies for investment based on quantitative analysis of factors
likely to influence companies' prospects for profit. Both perspectives
are powerful in their own right. By combining the two perspectives,
however, investors can gain deeper insights into a company's economic
prospects, and executives gain a perspective on how their actions influence
My business experience combines both perspectives. As a consultant
to managers of some of the world's largest companies since 1981,
the perspective I've developed on the characteristics that distinguish
leading companies from their peers has influenced the development
of the VQ.
Based on my consulting experience, I know that leading companies
Hire and motivate the smartest and most ambitious people
Offer employees an intense combination of on-the-job and
Win by giving customers more value than competitors
Avoid resting on their laurels, instead maintaining strict standards
for growth, profits, and conduct that drive the organization
Invest in pragmatic solutions to customer problems that could
become big new sources of revenue, regardless of who came up
Spend shareholders' money frugally
I've observed peer companies that
Hire and promote people who put their career interests ahead of
Shun tying employee evaluation to market leadership and customer
Adapt slowly to changes in their industry
Encourage competition for resources among functions
Exercise power from the top down
Beginning in 1995, I applied my management consulting experience
to investment analysis. Specifically, I invested in private companies and
evaluated investments for TV, print, and online media. Two Web sites,
bigtipper.com and validea.com, tracked the change in the value of my
recommendations for publicly traded stock investments. As Figure 1.1
illustrates, from 1998 to the first half of 2000, the return on my publicly
traded stock recommendations exceeded those of the S&P 500.
Beginning in 2001, I publicly predicted (on TV and in online and
print publications such as BusinessWeek Online, TheStreet.com, and
others) price declines in several securities. Investors could have profited
from these predictions by selling short. In a short sale, investors
borrow securities from a broker who sells the shares and holds onto
the proceeds. The short seller then has an obligation to repay the broker's
loan of the shares, or cover, by buying back the shares on the
open market. The short seller bets that the price of the shares will
drop; the short seller can then repay the loan with cheaper shares,
pocketing the difference. Short selling is very risky because if the share
value rises, the short sellers' theoretical losses could exceed the amount
of the original investment.
My predictions of stock price declines between January 2001 and
July 2002 could have generated significant profits for investors. For
example, individuals who had sold short the securities of four companies
that I had publicly questioned on the date of the following articles'
publication and then covered their position on July 25, 2002,
would have earned a return of 1,161 percent. Examples include the
Williams Communications Group. I recommended shorting this
company in March 2001 in an article in the Oklahoman, a few weeks
prior to its spin-off by Williams Energy (WMB) because it appeared
to have too much debt and large net losses in an industry that had too
much capacity, leading to substantial price cuts. Furthermore, its management
consistently issued public statements that emphasized positive
developments while glossing over negatives, denying it would file
for bankruptcy almost up until the day in April 2002 when it filed for
Chapter 11. In March 2001 Williams Communications Group traded
at $9.85. Although the company was bankrupt, its stock still traded at
3 cents a share on July 25, 2002, yielding a 3,273 percent return for
those who covered their position that day.
VeriSign (VRSN). I suggested that this stock could tumble in a
Business Week Online article on March 12, 2002, when it was trading
at $32.38. The article argued that VeriSign had overpaid for acquisitions,
lacked a clear corporate strategy, was shrinking in its core business,
and had dwindling cash. On July 25, 2002, VeriSign stock was
trading at $5.64. If readers had covered their position on July 25, 2002,
their return would have totaled 474 percent.
AOL Time Warner (AOL). I argued that this stock was overvalued
in a June 29, 2002, e-mail newsletter when it was trading at $15.
I believed that the value of AOL Time Warner's assets was overstated
because approximately 75 percent of the assets were goodwill and
intangibles that would need to be written down. I also believed that
AOL Time Warner's $28 billion in debt was high relative to its equity.
By July 26, 2002, AOL was trading at $9.35 a share. If readers had covered
their position on July 25, 2002, their return would have been 60
WMB. In an article in TheStreet.com on June 5, 2002, I questioned
management's credibility based on its actions in driving
Williams Communications Group into bankruptcy. I was further concerned
about WMB's liquidity and its exposure to the merchant
energy sector, which seemed to have diminished profit prospects. At
that time WMB was trading at $9.12 a share. On July 25, 2002,WMB
traded at 97 cents. If readers had covered their position on July 25,
2002, their return would have been 840 percent.
The approach I used to forecast the direction of specific stock
prices also informed the development of the Value Leadership concept
and the VQ. The stock picks were intended to take advantage of
broader stock market trends. I recommended buying certain stocks
when the overall markets were rising and selling specific stocks when
the overall markets were tumbling. I used the following criteria to pick
companies whose stocks I believed would rise during the period when
the overall market was rising:
They did business in a fast-growing market segment.
They were more profitable than other companies in their market
Their executive team was very talented.
They were market leaders.
I used the following criteria to pick companies whose stock prices I
thought would decline during the period when markets were dropping:
Their accounting was complex and difficult to understand.
Their accounting appeared to overstate the health of the company
given deterioration in the profit potential of its industry.
Their management declined to answer questions attempting to
clarify the complexity of the accounting or the variance between
the financial statements and the condition of the industry.
The management and stock selection criteria I derived from my
experience contributed to the formulations of the principles of Value
Leadership. As Table 1.1 illustrates, referring to the lists of criteria just
described, some of the Value Leadership principles were consistent with
leading management and rising-market stock selection criteria. Other
principles were the opposite of management criteria for peer companies
and down-market stock selection criteria. For example, the principle
"Value human relationships" is consistent with these leading
company criteria: "Hire and motivate the smartest and most ambitious
people" and "Offer employees an intense combination of on-the-job
and classroom training." It is also the opposite of peer company
criterion "Hire and promote people who put their career interests
ahead of the team's. "And it is consistent with the rising-market stock
selection criterion "Their executive team was very talented."
As we noted in the Introduction, Value Leaders can offer examples
that illuminate the concept of Value Leadership. The introduction also
clarified the connection between the principles of Value Leadership
and the qualitative and quantitative criteria used to select the Value
Leaders. Although Value Leaders have performed well in the past,
readers should not infer that the specific Value Leaders discussed in
this book will continue to perform well in the future. As long as these
eight Value Leaders continue to follow the seven principles of Value
Leadership, they should continue to perform well. If they diverge from
these principles, their performance could deteriorate. Just as the shadows
on the cave wall depicted reality of the cave dwellers in Plato's allegory
of the cave, the Value Leaders represent a useful way to perceive
how the concept of Value Leadership manifests itself in the world.
With that as a caveat, it is worth noting that the eight Value Leaders
significantly outperformed their peers in shareholder value, sales
growth, and profitability. As Figure 1.2 indicates, Value Leaders
increased their stock prices at almost five times the rate of the S&P 500
index between 1992 and 2002. This period began with a recession that
ended in 1993, was followed by an economic boom from 1993 to 2000,
and ended with a recession that began in 2001 and is still under way
at this writing. Figure 1.3 shows that Value Leaders grew their revenues
33 percent faster and earned 109 percent higher profit margins than
their industries between 1997 and 2002.
As we discussed in the Introduction, the VQ helps executives gauge
how well their companies use the seven principles of Value Leadership
that have contributed to the Value Leader's excellent track record. The
VQ takes the concept of Value Leadership down to the level of principles,
activities, and tactics. It helps executives quantify how well their
companies follow Value Leadership by comparing their company's
activities and tactics to those of companies that come closest to realizing
The VQ can be used at two levels. First, it can help executives conduct
a relatively quick activity-level diagnostic analysis that pinpoints
specific Value Leadership areas in which a company most needs to
improve. Second, the VQ can be the focus of a more detailed tactical
change initiative designed to develop an organization so that it
achieves and sustains superior performance.
HOW CAN THE VQ HELP YOUR BUSINESS?
The VQ can help you make your business more successful by pinpointing
opportunities for improvement that have been shown to
enhance performance. To demonstrate how the VQ can help, this section
first provides an example of how the VQ is applied to Synopsys,
a Silicon Valley company. Second, it offers benchmarks of VQ scoring
based on a Value Leadership database (as detailed in the Appendix).
Third, it describes a process that you can use to apply the VQ to your
Excerpted from Value Leadership
by Peter S. Cohan
Copyright © 2003 by Peter S. Cohan.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Introduction: What Is Value Leadership? 1
1 Where Do You Stand? (Start with the Value Quotient) 25
2 People Matter (Value Human Relationships) 53
3 Two Heads Are Better Than One (Foster Teamwork) 81
4 Growth Matters (Experiment Frugally) 107
5 Trust Is Vital (Fulfill Your Commitments) 137
6 Success Can Breed Failure (Fight Complacency) 165
7 Profit Is Vital (Win Through Multiple Means) 189
8 Doing Good Matters (Give to Your Community) 221
9 Actions Speak Louder Than Words (Instill Value Leadership in Executives, Investors, and
Appendix: Selection and Value Quotient Analysis of Value Leaders 275
The Author 304
What People are Saying About This
"Peter Cohan has produced a thoughtful and well-written analysis of what it takes to build and sustain a successful business organization. He employs real-life business examples to illustrate his points and he makes a compelling case for the principles which he believes can make or break a company." — Samuel L. Hayes, III, Jacob H. Schiff Professor of Investment Banking, Emeritus, Harvard Business School
"Value Leadership is an insightful and inspiring book. It recognizes that restoring trust in corporate America will take more than legislation and compliance with regulations. It will demand a fundamental re-examination of corporate values, cultures and relationships. Cohan presents a cogent, practical model for this process, which should interest investors, executives, board directors, employees, policymakers and anyone who wants to see business generate value for society, in a sustainable and ethical way." — W. Michael Hoffman, executive director, Center for Business Ethics at Bentley College
"Value Leadership evolves Cohan's earlier paradigms into seven extremely clear principles to he lp both graduate students and managers in our executive education programs analyze companies in today's hot fields like genomics, bio-informatics, and photonics. I think his principles, cases, and tools will also be quite useful for managers, venture capital investors, board members, and others who have to assess and guide growth businesses." — Barry Unger, chairman, science and engineering program division of extended education and faculty of photonic, Boston University
"There are two things every executive should understand about Value Leadership. First, the Value Quotient is a strategic assessment and planning tool that is easy to understand, and put to work. Second, it actually does work. Brilliantly." — Michael Alan Hamlin, author, The New Asian Corporation and CEO, TeamAsia
"It's so easy to commit conceptually to value leadership, but so hard to implement that commitment in a sustained way and to achieve best-in-class results. Cohan provides guidelines for a systematic approach to both implementation and measurement of value leadership derived from his in-depth studies of companies that demonstrate sustained value leadership. The world needs more value leaders. Peter Cohan can help." — Mark P. Rice, Murata Dean, F.W. Olin Graduate School of Business, Babson College
"Value Leadership is an extremely important book because it lays out a clear and navigable road map for companies to restore trust with customers, employees and investors. It thoroughly integrates uplifting principles with a thoughtful measurement approach to ensure outstanding results, providing a healthy antidote to the cynicism that has grown so pervasively...I recommend this book strongly to boards and management teams, who are almost universally dealing with these issues." — Bill Kelvie, CEO, Overture Technologies
"Peter Cohan takes us back to the future with laser-like focus through the prism of value (based) leadership. Cohan appeals powerfully to our natural instincts to "do the right thing", and reminds us that honesty, integrity, and character in their full splendor are the truly enduring elements of successful American capitalism—and, as important and measurable as profits and growth. Value Leadership is a much-needed prescription at a unique time in American business, and stands apart from its genre by reminding us of the traits that make the pursuit of profits a noble cause". — Mahesh Krishnamurti, publisher and CFO, Worth Magazine