Random Thoughts: Day 40/41 , Saturday/Sunday Oct 16th/17th, 2010

Saturday is here and we have two sessions today, before we get a day and half of break from reading !

The first case was on what mechanisms you can use to drive shareholder value for management teams. One option is to use "EVA" or "Economic Value Added" We explored whether tying senior management's paychecks directly to the creation of shareholder value makes sense.

We looked at some excerpts from GE's annual reports to get a sense of Jack Welch's view on leadership and his aggressive stance. Here are some paragraphs from one such report:

On Relishing change: "We've long believed that when the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight. The only question is when."

On leadership: "It's about the for "E's" we've been using for years as a screen to pick our leaders. "Energy": to cope with the frenetic pace of change. "Energize": the ability to excite, to galvanize the organization and inspire it to action. "Edge": the self-confidence to make the tough calls, with "yeses" and "noes" - and very few "maybes". And "Execute": the ancient GE tradition of always delivering, never disappointing"

On dealing with evaluating leaders: " Type I: shares or values; makes the numbers - sky's the limit ! Type II: doesn't share the values; doesn't make the numbers - gone. Type III: shares the values; misses the numbers - typically another chance, or two. None of these three are tough calls, but Type IV is the toughest call of all: the manager who doesn't share the values, but delivers the numbers; the "go-to" manager, the hammer, who delivers the bacon but does it on the backs of people, often "kissing up and kicking down" during the process. This type is the toughest to part with because organizations always want to deliver - it's in the blood - and to let someone go who gets the job done is yet another unnatural act. But we have to remove these Type IVs because they have the power, by themselves, to destroy the open, informal, trust-based culture that we need to win today and tomorrow"

GE and Coca-Cola have been for years ranked in the top handful of firms in the "most admired companies" polls. Both have had strong cultures and high profitability - though of late GE seems to be having all sort of troubles. But they have very clearly articulated vision of what drives success. Coca-Cola CEO stated in one the annual reports, " As businessmen and businesswomen, we should never forget that the best way for us to serve all our stakeholders - not just our share owners, but our fellow employees, our business partners and our communities - is by creating value over time for those who have hired us".

The question was how to incentivize the management team to deliver on share holder value ?We debated a case of a company which used EVA instead of the traditional revenues/EBITDA/Net Income parameters.

Economic value for shareholders is created when a firm earns a rate of return on invested capital which exceeds the cost of capital. For a particular year, the EVA is:

(average capital employed during the year) * (spread between cost of capital and return on capital)

The biggest difference between EVA and stock options is this: EVA looks at past, whereas the stock options looks at the future. It is quite complicated to explain EVA to all levels within the organization - and hence it has not been a popular form of incentive. However it is quite useful in deciding the operating efficiency and can be used to judge acquisitions very effectively.

The final session was on Marketing, where we debated the approach Unilever took to launch Dove as a Master brand, under the title of "The Dove campaign for Real Beauty". To most marketing observers this was an unqualified success, but was done using the risky and unruly, unmapped world of Internet Media. Today, digital marketing is a hot topic for many companies.

It was a good pleasant day and we decided to play tennis for a few hours. It was very good. And today was Indian Dinner at this fine place called "Kashmir' . Though the food was good, the service level could improve a lot. After dinner went to the Liberty Hotel for a drink, before coming back home. It was an enjoyable evening.

It was relaxing Sunday morning - though it was quite nippy in the morning, I went for my long run - did 12 KM today - which was the best I have done till date here. Had lunch with all our Indian colleagues. And towards the evening, started preparing for the classes the next day. The fall is in full force here .... and some of the colours are wonderful. Here are some pictures ...