Shareholder value and me.

• Author: Seely, Michael W.
• Position: Includes related article

A personal reflection on the search for the elusive compass that leads to corporate greatness.

In the early 1970s I was finishing up a night school MBA at NYU while employed as the assistant financial officer of a Fortune 100 conglomerate, Avco Corp. (now part of Textron). Avco consisted of 17 units, some of them partly publicly owned, funded through an acquisition debt-heavy borrowing structure that was growing more wobbly by the day.

Dissent was rampant among shareholders and dissension prevailed internally. The board, dominated by executives of a large subsidiary acquired a few years earlier, was growing churlish as performance lagged; flourishing business units resented the claims that headquarters made on their cash flow; and senior staff were disheartened by what they perceived to be a fitful management style and unclear operating strategy. The CEO lived from board meeting to board meeting, too proud to step aside but too weakened by the company's poor results to ordain important decisions. The only happy participants were the investment bankers who pitched us one marginal refinancing scheme after another.

We lacked a compass. In that vacuum, political jockeying was rampant and incentive rewards were more often bestowed on the basis of whim than performance. Avco, once a proud pathfinder in many industries from aerospace to finance, had ridden into a box canyon in the twilight of the conglomerate era. It was not a pretty sight.

As a glib MBA student, I could readily recite the logic of the diversification Avco had pursued. If you combined revenue and earnings streams that co-varied inversely, the disaster-level cash flow - when the banks started telling you what to do - was elevated. Units could share skills and market knowledge. The internal capital market could function better than the external one in apportioning capital, weighing reinvestment alternatives, and so forth.

The only problem was - it wasn't working at Avco. That's when it occurred to several of us that there had to be a better way.

A seductive ring

At the time, Joel Stern - father of today's EVA methodology of measuring corporate performance - was doing missionary work at Chase Manhattan, telling anyone who would listen that "earnings don't matter," that "cash is king." It was clear to us from our own experience that investors didn't reward us for doing things for them that they could do better for themselves (such as diversify their own holdings or reinvest earnings). For those of us employed by declining conglomerates, Joel's words and those of others like Richard Brealey (now of the London Business School) had a seductive ring. But the core message about what investors truly revere wasn't getting through to us - or to most of Corporate America. Paychecks were still ordained by where you were on the...