Price – earnings per share matter, no question here, however, as an intangible asset strategist and risk specialist…neither provides a sufficient – comprehensive portrait of a company’s real value. For publicly held companies, market analysts, financial advisors, and, of course, shareholders, etc., routinely influence, rely on – apply conventional business metrics relative to share price and earnings per share to value a company. For the most part, these factors are the commonly agreed upon data points to reflect the effectiveness of a companies’ execution on its announced strategy going forward. That’s all fine and certainly understandable insofar as conventions. https://kpstrat.com/wp-admin/post.php?post=244
To be sure, I recognize the challenges associated with any initiative to move outside convention, i.e.,…this is the way it’s always been done…we’re satisfied with the way it is… and, we see no reason to change now! Those holding business fiduciary responsibilities and are routinely playing influential roles in identifying and executing transactions and valuation of publicly held companies, not infrequently pay far too little attention to the contributory role and value of intangible assets embedded in both share price and earnings per share. As such, it becomes all-the-more likely ether party will leave substantial value, i.e., sources of revenue, competitive advantage, stability, and resilience on negotiating tables everywhere. https://kpstrat.com/wp-admin/post.php?post=359
It’s a universal economic fact that 80+% of most company’s value…sources of revenue, competitiveness, and sustainability lie in – emerge directly from intangible assets, primarily in categories having to do with intellectual, structural, and relationship capital!
There is no attempt here to contest whether a company’s…share price, earnings per share, and shareholder perspectives have due relevance to the valuation of publicly held companies. Share price, as I have come to characterize it…
- is a composite (reflection) of a company’s performance with, as they say, many moving parts, i.e., variables, some of which can be variously (market) fickle.
- can be part conjecture, part company appetite and/or tolerance for risk, part balance of supply–demand, part rooted in the fluidity and/or volatility of (market, shareholder) expectations, and part deliverables relative to intangible asset categories.
- also represents outputs (of a company’s products, services) which contain – are embedded with various types-categories of intangible asset inputs, primarily some form of intellectual, structural, and/or relationship capital which collectively constitute ‘a contributory role and value’.
Company’s future performance based on prior performance is convention…of course, there is a percentage of shareholders who base a company’s future performance expectations, ala share price and earnings per share, on a companies’ prior performance. So, when a companies’ performance (repeatedly) exceeds shareholders expectations, logically, markets and shareholders will expect more of the same and thus inclined to factor those expectations into prognosticating (influencing) share price.
Another relevant prelude to shareholder value occurs when earnings per share exceed investor expectations…for some, this is perceived-portrayed as somewhat of a paradox, i.e., when a companies’ operating performance is consistently good, it is likely to influence shareholders to expect (assume) a company will perform similarly in future-successive quarters, ala sustainable improvement.
However, when expectations of sustained performance fall short…one way the market and shareholders dissatisfaction is exhibited is influencing a lower share price. More specifically, when a companies’ operating performance remains good, investors (shareholders) will expect sustained improvement. Surprises to the contrary, will influence more harsh responses. i.e., companies’ – management teams make missteps, miscues, and/or fail to meet expectations, investor response will emerge in lower share price. https://kpstrat.com/wp-admin/post.php?post=5532
Management by objectives and intangible assets…seldom can companies avoid this perceptual paradox. There may be a viable alternative from which to recognize – measure company value in a slightly different way, certainly not convention.
Some readers may recall management-by-objectives (MBO)…first popularized by Peter Drucker in his 1954 book The Practice of Management. MBO is the process of defining specific objectives within an organization which management teams can readily convey to employees and then, in variously collective – collaborative ways, decide how each objective can be achieved (managed) in a relevant and usually sequential manner.
The MBO process allows management teams to…engage-apply work that needs to be done somewhat sequentially, to allow for a composed and productive process (work environment). My own experience with mounting a reasonably well-executed MBO process may also contribute to employees recognizing how each of their accomplishments (objectives reached) contribute to achieving the larger mission. Also, experientially, MBO tends to contribute to a work environment in which there exists a personal (individual) sense of achievement which becomes variously embedded, somewhat as a company culture.
Of course, a very important component of MBO is…the measurement and comparison of each employee’s actual (contributory) performance. Logically, and rationally, when people are involved in establishing goals – objectives and choosing how those goals-objectives are to be achieved, Drucker believed they are more likely to fulfill their (contributory performance) responsibilities.
Similarly, it would also be logical to…assume financially based MBO’s, could lead companies to be achieving more (consistently) viable, flexible, and sustainable value propositions for investors? In large part this would encompass company’s intrinsic (intangible asset) values, and, to be sure, MBO would serve as a key to upwardly mobile consistency insofar as elevating the potential for (company) growth in value and innovation. And yes, it can lead to a more disciplined approach to valuing – distinguishing a company’s strategic alternatives.
Intangible asset – intrinsic company value…incorporating MBO to intangible asset (intrinsic) value to companies is a forward-looking measure of the worth-value of a business. And, through these lens, it is a truer, more comprehensive and strategic reflection of a company’s value, sources of revenue, and competitiveness, etc. Too, when one applies intrinsic (intangible asset) values to guide their decision making, my own experience indicates they are substantially more likely to recognize factors, intangible assets in particular, which can be developed, positioned, applied, and exploited to more consistently, favorably affect share price and earnings per share.
Too, in an intangible asset intensive – dependent business environment…one is more likely to focus on any-all intangible asset inputs which can be subject to stewardship, oversight, and management practices, providing of course, the key intangibles are strategically aligned to achieve value, competitive advantage, sustainability, and sources of revenue.
Adapted by Michael D. Moberly from the work of Aaron Gilcreast and Larry Jones in a article titled ‘Focus On Intrinsic Value, Not Share Price To Surpass Investor Expectations’ in ‘strategy+business’ October 2, 2017.
October 24, 2017 St. Louis firstname.lastname@example.org ‘The Business Intangible Asset Blog’ since May 2006 where one’s attention span, intangible assets, and solutions converge!
Readers are invited to search other blog posts, papers, and books I have published at https://kpstrat.com/blog