- Earnings delivered from efficiency help meet investors’ return on capital aims. However, competitors and new technology crank down the ability to deliver those returns constantly.
- Growth is vital. It replaces earnings attrition and delivers enhanced total shareholder return.
- Growth comes from well recognised sources, but breakthrough growth is often attained as a result of new ventures and other initiatives. All involve risk and embracing the new.
- This entails igniting the imagination and engagement of top talent, and that means reframing thoughts on executive pay to meet the aspiration. At the same time, pay must be both effective and sensitive to the wider scene, particularly the views of investors.
- New challenges need new thinking, with solutions delivered in a concise and compelling way.
- This must be achieved within the ambit of a sound climate and ESG agenda so that the business will thrive sustainably.
ALL OF THIS IS EASY TO SAY BUT HARD TO DO
Income : Growth Analysis (IN:GRid)
Shareholders ask companies to deliver two main things; INCOME and GROWTH ideally both at once and delivered SUSTAINABLY
Early stage companies are often rich in growth opportunity, but low on shareholder income. Mature companies tend to be the reverse. In fact, they often need to use income to refresh their growth profile by investment.
The IN:GRid Analysis shows a company’s position on Income and Growth at once, and historically and mapped against peer comparators. The IN:GRid Analysis does not need management assumptions. All of the figures are based on observed stock market data. IN:GRid is a disaggregated Relative TSR analysis.
It is a management tool to discuss current state and future aims. IN:GRid Analysis challenges boards to ask:
“Are we pleased with the Income Growth trade off flagged by our shareholders?”
“If not, what is our desired better position; and how do we get there?”
Why is IN:GRid Important?
What are your stakeholders expecting?
Business Growth Profile the Theory
Companies tend to follow this growth curve
THE Growth: Income Problem: The DCF Trap
As a company matures, it often trends from a high growth low income mix, to a low growth high income mix. Shareholders should be pleased with any good mix in total, but ongoing correct delivery is difficult.
- Staying still at high income is very hard – except for natural monopolies, Porters 5 forces erode current profits absent action
- Income “erosion” is ongoing, and so ongoing investment from income and elsewhere is not optional.
The Virtuous Reinvestment Circle
This compulsory investment is recognised as a flaw in normal Discounted Cashflow Model (DCF) as the no invest case wrongly assumes constant BAU cashflows.
The DCF Trap
- Most executives compare the cash flows from innovation against the default scenario of doing nothing, assuming – incorrectly- that the present health of the company will persist indefinitely even if the investment is not made.
- For a better assessment of the innovation’s value the comparisons should be between its projected discounted cash flow and the more likely scenario of a decline in performance in the absence of innovation investment.
Christensen, Kaufman and Shih: Innovation Killers: HBR January 2008