Good corporate governance should be more than systems and practices to avoid substantial value depletion if the company runs afoul of regulations or decides to pay some executive more than some watchdog thinks is appropriate. It should also incorporate proactive value planning and execution. Every year some corporate managements propose and boards of directors approve billions of dollars in spending in support of businesses that have not had a rate of return that is higher than their cost of capital for several years, have not presented viable plans for significant improvement, yet are growing in size. High return businesses fail to develop plans to expand. Common wisdom holds that all growth is good growth, and that anything that is accretive to earnings is worth pursuing. These are dangerously naive beliefs that undermine responsible corporate governance.

Measured in either current expenditure dollars or market value terms, this shortfall in corporate governance eclipses any estimate of the dangers of excessive executive compensation or internal control problems. Even companies that in the aggregate have value-creating rates of return have business units with negative spreads, and value-depleting plans being funded. 

If you are a senior corporate manager or member of the board of directors, ask yourself:

• Do you know where in the corporate portfolio of businesses growth (or disinvestment) will most likely create value for shareholders? 
• Do you know the current real economic returns and warranted value of every business in the corporate portfolio?
• Do you know if business unit plans should create value for shareholders if they were achieved?
• Do you communicate a realistic and viable value plan to your investors?

Board review and approval of company strategies and plans for resource allocation would benefit from a periodic mapping of the value of all the components of the corporate portfolio. Contact us to discuss how we might augment your current practices.