Our clients realize that for the full benefit of Postmodern Corporate Finance to take hold, it must become a core part of their business by embracing Internal Capitalism. This entails a re-engineering of their internal processes, measurements and incentives to align the business, at all levels, with the interest of shareholders. However, we are not ‘zealots’ and do not require a wholesale adoption of our analytical framework. Rather, we work with clients to build the right measures and tools for their business and reinforce this by ensuring incentives are aligned and the right behavior is encouraged.
Our work focuses on several key areas:
- Performance Measurement: We do not predetermine the best performance measure(s), however, we understand the strengths and weaknesses of the prevailing measures commonly used and we work with our clients to develop the right balance of accuracy and understandability to motivate the right behavior for the organization. It is critical during this phase that internal buy-in in obtained because if the measure is not understood or embraced, its impact on the organization will be severely limited.
- Required Rate of Return: We have developed our own unique approach to determine a market required rate of return and we will compare this to more traditional methods of determining the cost of capital to recommend a practical approach that properly recognizes businesses risk, capital structure, economic factors and country risk.
- Performance Drivers: Our Performance Drivers methodology forms a common linkage across the business management methodologies. Performance Drivers are sub measures that influence and help us to understand the causes of changes in the ultimate Performance Measures. We work with clients to establish a unique set of growth, profitability and asset utilization indicators that influence the high level Performance Measures discussed above. This establishes a vital link between the value-based Performance Measures and the strategic and operational levers through which the division managers must influence their businesses. The Performance Drivers framework helps managers to better see the influences on their performance and better understand what can be done to improve.
- Revise Business Management Practices: By coupling the insights from our Internal Capitalism Diagnostic phase, we recommend changes that will better align our client’s existing business management processes with the interests of shareholders. We incorporate the Performance Measures and Performance Drivers into all key aspects of the company’s decision making and incentive processes. This delivers key benefits including:
- Incentives to Simulate Ownership: We help design and develop an incentive plan that better motivates managers to create long term shareholder wealth. We work with our client’s existing compensation consultant to build the right incentives and structure necessary for our clients needs.
- Better Indications: New tools and measures that are better aligned with the interests of shareholders.
- Added Accountability: Performance measurement will be on the same basis as decision making to properly capture the effectiveness of decisions.
- More Understandable: Fewer and more consistent measures make it easier for non-financial managers to understand.
- Training: To reap full benefit, employees should embrace the new framework and understand the calculations and motivations. They need to understand how they can increase performance through their decisions and efforts. They must also be convinced that their exceptional efforts will be rewarded with exceptional incentive payments over time, too. The communications must link this program to other company initiatives to ensure consistency of message. Finally, managers need to see the commitment of senior executives and the importance in the company’s long term strategy.