Companies don't create value. People do.
This simple fact has major implications
Companies don’t create value. People do.
Depending on your perspective, this statement may seem either obvious or blasphemous. Nothing is more accepted in the corporate world than the idea of the value-creating company. It is front and center in our language of how we talk about companies and how we measure executives. “How much value did company X create, vs company Y?” “Is this CEO’s performance maximizing shareholder value?”
It is possible, though, that our language obscures the real truth about value creation.
What is a company? There are four categories of things that comprise any company, whether a public corporate or an LLC or a partnership:
Assets. Companies have hard assets like cash, equipment, real estate, raw materials, and accounts payable (money others owe them). They have intangible assets such as their IP, their brand name, and their reputation.
Liabilities. Companies owe money to individuals and to other companies and governments.
Equity holders. The people or entities who own the company and can financially benefit from any value created through the company’s activities.
Employees and contractors: People tasked by the owners with managing the assets and increasing the value of the equity. Sometimes equity holders are also part of this group, sometimes not.
Only the fourth is not captured in standard financial statements. But only the fourth group ever actually creates value. Absent any assets, a person or a team can create value through invention and ingenuity. Absent the work of the person or the team, the asset creates nothing. A machine, a building, a brand name, a patented technology—all of these were created by people, and cannot create value absent those or other people. They can appreciate, but that is not the same as creating value. They are mere tools that the people can use to create value.
We often say that a product “sells itself.” But it doesn’t. People have to create the product, build the market for it, create the means to sell it (whether automated or manual), and deliver it.
Value is created by people, and only by people. The value created by a company is nothing more than the sum of the value created by the people and teams within the company over the course of the company’s life. These people leverage the assets the company has, assets acquired or built either by them or by other people who worked at the company before they did.
As I said at the outset, this may seem obvious if it doesn’t seem blasphemous. It may sound pedantic. But I believe it is important because of the implications it has for business leaders. Here are three of those implications.
Implication 1: If your people drive all of your business value, you should take care of them.
Companies are very protective of their assets—especially intangible assets—and manage them carefully. They are protective of their brand and reputation, and consider brand impact before changing prices, entering partnerships, launching products, and a host of other activities.
They should be just as precious about their people. They should listen to what their people are saying, support them in their goals, and create opportunities for them to grow and succeed. They should ensure they create an environment of safety and belonging where people can do their best work.
None of this is new. But it is often considered “soft” or “fluffy,” away from the hard work of value creation. Once we realize that this work is value creation, because these people are the only way our business ever creates value, its importance changes.
Implication 2: Maximizing your people’s performance is the number one job of every CEO.
CEO’s manage a lot of stakeholders. There are the shareholders, to whom they are ultimately accountable. Their major customers, who occasionally want to talk directly to the CEO about products and services. Regulators and governing bodies, especially in the context of public companies. Creditors and debtors. Partners. Employees and contractors.
Engaging with some of these groups—customers, creditors, partners—can be considered the dreaded “working in the business rather than on the business.” If a CEO has strong and empowered leadership throughout the organization, he or she may not have to over-index on any of these groups. Others can do so.
Shareholders, regulators, and employees do require the CEO’s time and attention, and these relationships cannot effectively be delegated. Importantly, though, only one of these groups creates value for the business. CEO’s concerned about creating value should spend their time and energy focused on the group that creates that value.
What does that mean the CEO needs to do? First, make sure you have the right people to do the job. Be exacting in your hiring standards. Second, put them in a position to succeed. Give them the right tools and the right environment, limit extraneous requirements and distractions. Third, invest in their development. Ensure your people are continually growing and improving. No one is a finished product.
This focus is how you can maximize value.
Implication 3: Measure your people performance with as much rigor as you measure financial performance.
We have previously written an article in this newsletter about the problems in the measurement of learning and development efforts, but the issue is actually much more fundamental than that. While companies always measure financial performance and frequently measure their most important KPIs in operations, sales, marketing, and more, the success of their people efforts rarely receives the same attention. Instead, we are like the baseball scouts in Moneyball, confident that our expertise and years of experience gives us all the insight we need, and unaware of the gaping holes in this conventional wisdom.
Again, if we reframe our thinking to recognize that the people we have create our company’s value, this lack of attention is a glaring error. These are not “soft” issues. They are at the core of our business success.
If we’re taking these issues seriously, we have to ask ourselves a few challenging questions.
First, do you understand exactly how each person and each role in the company creates value? What activities drive this value? What are the most consequential differences between top performance and average or poor performance?
Second, are you able to measure this value creation in a meaningful way, or are you basing performance reviews primarily on the subjective and likely flawed views of a person’s manager?
Third, are you able to articulate the gap between exemplary performance and a person’s actual performance, in a way that makes it clear what they need to work on and how they can drive greater impact?
And fourth, are you able to accurately gauge potential and predict performance in different roles, or are you merely making people decisions based on your gut?
If you’re not able to do any of these four things, don’t worry, you’re not alone. Except, maybe, do worry a little. Because your decisions in these areas will determine how much value your business is able to create. If you are approaching them blind, you are just hoping to get lucky.
If you think of people issues as “soft” and not worthy of the CEO’s time, stop doing so. Instead, take care of your people, focus on maximizing their performance, and make sure you’re measuring that performance with as much rigor as you possibly can.
Thanks,
The Impactful Executive Team
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