Best Practices Advisory, llc
I frequently find myself reviewing businesses where I can relatively quickly see how the business could significantly improve its operating performance. Why? One argument could be that I have a broad wealth of experience on identifying and implementing significant improvements that increased shareholder returns. But so do the people that I advise or work for. The CEOs and clients that I have supported can rightfully claim that they have just as much if not more experience than me and a focus on shareholder returns.
Is it that I worked for GE and a Value-activist Hedge Fund - and know what Industry leaders do to achieve their goals? Maybe. At the end of the day, I believe it comes down to three must have requirements that CEOs, Boards, and leadership teams must have to drive and maximize shareholder returns and value creation:
1. Begin with the understanding that there are No Sacred Cows around Value Creation: Have the
courage to challenge the status quo.
2. Don't be shy - Maximizing profits and thereby shareholder value is the goal.
3. A relentless commitment to making continuous improvement everyone's responsibility
A great recent example has been the transformation at Burger King. In just three short years, Burger King has challenged the status quo – on the way they operate their business, implemented new and better ways to generate growth and earnings, and is continually challenging their team and staff to find even more new ideas and ways to improve their business.
Burger King owned over 2,300 of its restaurants out of a total of 12,174. Why does Burger King need to own restaurants? A main reason is to have dedicated sites where the business can test new ideas, products and services before rolling them out to their valuable franchisees. But do you need 2,300 test sites? It is clear that you do not need that many owned restaurants. Now they own only 52 restaurants – and have significantly improved cash flow.
To give just a few more examples, Burger King is using skype for long-distance calls, they are scanning and e-mailing documents that used to go out Fed Ex, and they are simplifying menu choices and operating procedures. It sounds like small stuff, but add it all up and these changes drive $millions in cost savings and improvements that can then be re-invested in other capital projects or opportunities.
The biggest, most ambitious, and clearly controversial change has been the recent announcement by Burger King to buy Canadian-based Horton’s Chain, and relocate its headquarters to Canada to receive better tax treatment and benefits. The benefits are significant and therefore allow shareholders to further increase cash flow and earnings. Is it wrong for a company to pursue shareholder return maximization?
Today, we live in a global economy. Competition has never been fiercer or more challenging. Each and every opportunity that offers a way to improve your performance vis-à-vis the competitors and is done without question, legally, should be pursued.
Burger King is not at fault for moving it’s headquarter operations to Canada. It is a strategic move that improves cash flow and earnings – that ultimately will benefit not only Burger King Shareholders but also provide more investment for the business to continue growing and improving the operations around the world.