By Nancy Lurker
Building stakeholder value in a company is never easy. But doing so is the primary job of the CEO and company boards. During my career, I have observed many companies for which building stakeholder value is not a primary focus. Unfortunately, this is the result of people who often have other goals and priorities that take precedence, such as extending job tenures, minimizing risk, or staying in their expertise skillset. But without increased stakeholder value, over time the very premise of the business will be called into question. I’d like to share with you the four pillars on which to build your business, and in my opinion, they are crucial to driving stakeholder value.
1.THE RIGHT STRATEGY WITH THE RIGHT BUSINESS MODEL
When assessing a company as a new CEO (or head of a business unit within a company), it is important to identify if the core business model will drive near and long-term value and that the company strategy is built to capitalize on the business model. Conducting this assessment could take between 90 and 180 days, depending upon the company and the situation. During such an assessment, you must look at your talent, current capital structure and future capital needs, technology, position in the marketplace, current and future competitors, and the changing market landscape. In terms of strategy, identify if the company is in a business that is growing and has decent margins. If the business is shrinking, being massively disrupted, or its margins are unusually low, it is going to be difficult to be successful. Not impossible, but difficult. Let me give you an example. When I first joined a stagnant healthcare services company as CEO, I conducted a four-pillar assessment. As a result, we made some fundamental changes to our executive talent ranks and our core customer offerings. An outcome of these changes was increased transparency, which had a direct impact on improving the company’s communication, culture, and teamwork, along with keeping our balance sheet relatively stable. However, we did not change our core business model or the strategic direction of the company, as we could gain a lot of value just by executing better with the current business model.
We also made a lot of tactical changes resulting in accelerated growth for a business previously stagnant and losing market share. For the first few years, this was a winning strategy. Over time, however, margin pressures dramatically increased, as competition was selling on price. Further, the market itself was rapidly shrinking, which drove further negative price pressure. Putting these two dynamics together, it became clear we either needed to sell the business or pivot (i.e., reposition the company’s business). We opted to pivot. The new business had much higher margins but was very different strategically. Unfortunately, we did not have board alignment around future capital needs, which were much more robust than in the old model. Further, we weren’t aligned on risk tolerance, which is very important, as we anticipated negative cash flow for at least a few years. Lack of capital investment, insufficient risk tolerance, and lack of know-how in the new business resulted in lackluster results. In hindsight, we should have sold the entire company and returned cash to the shareholders. When opting to pivot, it is critical you not only get the business model correct, but also develop the proper strategy to execute on it. Be prepared to invest more than you think, as inevitably, unforeseen circumstances and events will materialize.
2.HIGHLY EXPERIENCED AND PROVEN EXECUTIVE TALENT
While running the healthcare services company, I had the opportunity to meet many management teams. I was amazed by the disparity in the quality of the talent. A small number of companies had highly experienced teams with a deep understanding of the key success drivers for their business, strong reimbursement experience, and leadership with high emotional intelligence that enabled a free flowing of ideas and pressure testing of action plans. Then there was the bulk of the companies with mediocre talent who muddled through. Finally, there were those teams you knew would be disasters. Here you tended to see leaders who lacked deep relevant experience surrounding themselves with “yes” people, or worse, critiqued anyone brave enough to challenge them. Such leaders are unwilling to listen to advice, and neither understand their customers’ needs nor the rapidly changing market environment for reimbursement. Getting superior executive leadership talent, with a proven track record of success in the company’s field, is a crucial component to driving stakeholder value.
3.PROPER CAPITALIZATION AND ALLOCATION OF CAPITAL
You can’t grow the business without money. Sounds obvious, right? Yet many management teams and boards get this fundamental principle wrong. Usually, they undercapitalize the business and put in place modest budgets and strategic plans in the mistaken belief they are being judicious and properly conservative. They also can have an unhealthy focus on current value dilution, resulting in a lack of operating — and more often — strategic investments. For example, in one company, we undertook a major acquisition which resulted in significant equity dilution, but it allowed us to leverage our infrastructure over more products and drive more rapid future revenue growth. The result was that even with the dilution, our market cap doubled as investors rewarded the multiple shots on goal, potential revenue acceleration, and selling, general, and administrative (SG&A) leverage. But this took a willingness to look beyond the current equity dilution, taking some well-thought-out risk, and bringing in the necessary capital to fund strategic expansion of the business.
How you allocate your capital is equally important. Spreading capital over too many risky assets can result in chronic dilution cycles or cutbacks to manage cash, and it results in the company not investing properly in any of its assets. Being in the life sciences business requires placing bets on often risky technologies. But having too concentrated a portfolio, or the reverse, a portfolio that’s too broad, can lead to misallocation of capital. Striking the proper balance to avoid such misallocations requires persistent and diligent attention to detail.
4.DRIVE THE CULTURE FOR TRANSPARENCY, INTEGRITY, AND PROPER RISK TOLERANCE
Early in my career, I worked for a successful company that was driven by a very healthy corporate culture. But once the CEO retired and the new CEO took over, everything changed. Over the next three years, this once stellar company went from an open, team-oriented culture to one that was secretive and highly political, and where honest discussions no longer took place. People became “yes people,” and egos and fear ruled. Not being able to tolerate the new culture, I opted to move on. Two years later, the company was engulfed in scandal, growth had tanked, talent was fleeing, and its top executives were under either SEC or criminal investigation. While this is an extreme example of how a company culture can shape stakeholder growth, it illustrates how vital the culture of a company is to its growth. It must begin with the CEO and the executive team. There must be a willingness to listen to dissent and a mindset of “servant leadership.” Finally, leaders must avoid hiring “stars” possessing low EQ (emotional intelligence). One way to ensure you avoid bad hires is to invest in personality testing prior, have multiple people interview the candidate, and conduct robust reference checks. How you hire and how you reward performance should become part of your company’s culture. Ensure that the performance process and bonus programs not only help drive achievement of corporate targets but also reward the values and behaviors you desire to instill and grow in the culture.
Driving stakeholder value is hard work, and the competitive, regulatory, and reimbursement landscape is increasingly becoming more difficult. But if you work to ensure these four pillars are strong at your company, it will certainly improve the likelihood of a path to success.
NANCY LURKER, CEO of EyePoint Pharmaceuticals, is a 30-year biopharmaceutical industry veteran.