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The Importance of a Total Value Perspective

Jack Welch, former head of GE, has recanted his previous espousal of "shareholder value". Michael Porter, Harvard academic, recently wrote about "shared value" to escape an outdated approach to value creation. The UK government has recognised it needs to make a major push on financial management across the public sector to help drive "value for money". What is going on?


At root, value in an enterprise emanates principally not from tangible assets but from satisfied customers. From there it flows to other stakeholders. There is a point of equilibrium at which the flow of value is optimised for all stakeholders. It is the job of the chief executive and board to identify that point and orchestrate value among stakeholders.

The concept of value takes the time value of money into account. Much of the value for stakeholders with a financial interest in an enterprise – for example, shareholders and taxpayers – resides in expectations about the future.

In its promotion of value for money the government should not confuse "financial management", which is largely about financial control and information, with value management. They are different, albeit complementary, disciplines requiring different, if complementary, skill sets.

A final general point: it is not sufficient for the chief executive of a privately or government owned enterprise to manage the value flow. Optimising value cannot just be done centrally. It is everyone’s job. When properly designed into an organisation, value is optimised by the behaviours and actions of people at every level and by all its stakeholders.

Four levels

In seeking to identify how to optimise the value flow across an enterprise it is essential to view the whole system. We can consider this at four key levels – customer, business unit, portfolio and stakeholder.

1. Customer level:

All value ultimately comes from the customer. This fundamental principle, at the centre of CVA’s approach since it was founded nearly 25 years ago, is often neglected by organisations and analysts. The focus on shareholder value looks at a result, not a determinant. Assessing the value delivered to customers and inherent in the customer base is complex. In-depth analysis and understanding are needed, and broader economic and societal issues related to marketing strategy need to be understood and taken into account.

2. Business unit level:

Business units should produce the value identified for customers whilst minimising required resources and focusing on continuous productivity improvement. This is an area where a great deal of value can be wasted - for instance through poor business unit design (usually over-bundling of activities), use of excessive resources, undertaking activities that do not provide value to customers, a focus which is inward rather than on what customers value, and mispricing. This level also covers internal service units which provide support to business units, another area where, usually for the same reasons, a great deal of value is often wasted.

3. Portfolio level:

The portfolio level looks across all the business and service units in an enterprise with a view to identifying the portfolio strategy which optimises value for stakeholders – what activities should be undertaken and what should not be undertaken or should be contracted out, what investments and divestments should be made, where resources should be focused to support growth, how each part of the business should be managed, and how all the parts of the organisation should be aligned to promote value. In the public sector, the portfolio level requires identifying opportunities across the public sector as a whole. Many activities which require rationalisation to optimise value for consumers and taxpayers are shielded by silo-based architectures and behaviours. A total value perspective will identify intrinsic and relative value, direct and indirect value, option value and the value of strategic flexibility in the face of an uncertain future.

4. Stakeholder level:

The focus at this level is to optimise value flow through defining the positioning of the enterprise vis-à-vis all stakeholders - customers, owners, employees, regulators, government, funders, suppliers, strategic partners, stock market participants, media and society as a whole. Regulation should be defined to include corporate reputation, so covering most of the economic and societal issues raised by Michael Porter in his concept of shared value. Tasks include understanding the stakeholders’ expectations and devising actions to meet them, supported by relationship and communication strategies. It is a big mistake for boards and chief executives to concentrate only on shareholders. Rather than spending their time building an equity story for shareholders chief executives should build a corporate story for all stakeholders.


Value based management has too often been observed in the breach in recent years. Not because it is "wrong", but because it has been focused too much on shareholder value. Jack Welch is right to say that this focus was misplaced and Michael Porter to say that enterprises have ignored some of the broader influences that determine their long term success. In their evaluation of strategy boards have generally failed to take a total value perspective and their deliberations have too often been dominated by chief executives. Financial markets have focused excessively on short term value and financial accounts. Public sector organisations have focused too exclusively on compliance and control and not enough on value.

Achieving better and more professional financial control and information is, particularly in the public sector, certainly a desirable goal. But that will not achieve the objective of optimising value, a field on which the finance profession is not focused. The requirements of financial regulation and the technical competencies that these necessitate are inherently different from value analysis.

Boards and chief executives need to recognise two things. That optimising value requires a total value perspective, and that financial analysis and value analysis are separate, but closely linked, disciplines, both of which are needed for successful performance.