The changing nature of business (pt 8): the rise of the shareholder

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In 2011, JP Morgan published a report showing that shareholder activism in companies worth more than $1.6 billion / £1 billion increased by 90% in the first three quarters of the year. Without meaningful change in performance expected in the immediate future, executive remuneration in particular is likely to remain a highly contentious issue.

However, if there is any degree of sincerity in shareholders’ focus, questions will almost certainly begin to rise around the performance of other business expenditures. And that means greater attention is likely to fall on non-labor costs, which (in all sectors bar financial services) form the biggest portion of an organization’s cost. 

Our research shows that 67% of finance leaders believe that shareholders are more concerned with news about revenue as a measure of business performance than on cost reduction. However, a larger proportion of finance leaders (86%) agree that shareholders should be focusing on profitability as a measure of underlying performance, to which non-labor costs are a major contributor. With growth forecasted to be low in the next few years, there is every chance that the attention of shareholders will shift towards how costs are managed and waste eliminated.

And this creates a great opportunity to get ahead of the pack, and demonstrate to shareholders that management is taking the necessary steps to ensure their investment are being well managed - over and above what the competition is doing.

The opportunity, then, is to broaden the conversations finance leaders hold with their shareholders to include an outline of where costs are being brought under control and the resulting improvement to underlying profitability lies.

Even modest reductions in non-labor costs could generate significant increases in profitability.

Any savings that are made, if captured, go straight to the bottom line. And these are not just one-off savings: they are removed from the cost base permanently. And that means sustained profit improvements. Which creates happy shareholders.