"Shareholder value" and the link to global recession

by Mark Payne

VIEWPOINT

What a difference a year makes. As the world entered the fourth quarter of 1997, the eyes of the international business community were focused on developments in the Pacific Rim. At that time, most analysts and commentators maintained a relaxed attitude on the likely duration of the difficulties. Many expected the crisis to be short-lived, lasting months at most, while others thought that the turmoil might not develop into a crisis at all. Some of the comments made at the time bring to mind statements made in August 1914, claiming that the First World War would "all be over by Christmas".

Today, the Asian economic crisis has become a global crisis and is still unfolding at a seemingly relentless pace. The consensus view now appears to be that the timeframe for a resolution of the crisis has extended to two or three years. Even such a view may still prove to "best case" rather than wholly realistic.

Unsure outlook

For many years, analysts - and papermakers - treated Asia as though it had discovered the economic equivalent of the Holy Grail. But the reality is that demand adjustments in the Pacific Rim will have a major economic influence for some time and the situation could get even worse in the future, rather than better.

A number of factors could all combine to haunt much of the Pacific Rim well into the next century, including the gearing ratios of many of South Korea's chaebol, the almost unfathomable depth of Japan's problems, Indonesia's socio-economic plight, the potential difficulties that China may yet have to face and the general meltdown of property and asset values across much of the region.

The "best case" view also fails to take into account what is arguably the biggest factor of all - the blow to the confidence of papermakers within and outside the Asia-Pacific region. There is a sense of shock at the adjustment to economic reality after years of endless and unbroken promise. It is a sobering thought to realize that even before the crisis struck in the second half of 1997, Asia accounted for a roughly similar proportion of global gross national product to its share back in 1900.

Distressed executives

To add to the pressures that have been exercising the minds of chief executives throughout the paper industry over the past year, the past few months have seen the emergence of new sources of discomfort. These are appearing in the form of economic and financial catastrophe in Russia and a possible Brazilian-led meltdown in Latin America. Not to mention the fall in the value of stock markets in the USA and elsewhere.

The past few months have also raised speculation of a potential economic slump or depression, as opposed to a general worldwide economic slowdown or mild recession. These comments have, however, largely focused on the situation in Russia as the catalyst for this possible development.

In reality, if the world does enter a depression it may well prove to be the end-result of the relentless focus on shareholder value, which has characterized much of the 1990s. Previously, this concept concentrated on the industrial side of the shareholder value issue, involving company managers adding value to their operations. Delayering, downsizing and generally raising efficiency and productivity measures took on the status of a corporate mantra.

Frequent references to "shareholder value", often associated with words such as "enhancing", became the norm for many chief executives' statements in recent years. As robust, commonplace and even heartfelt as these comments have become, executives have been under increasing pressure in recent years to add value and optimize share prices, no matter how difficult trading conditions might be. But the corporate side of the "shareholder value" equation is just one of the relevant dimensions of this issue.

It could be argued that it is shareholders in the form of the middle classes of Europe, Asia and most especially North America, as well as the countless financial institutions such as pension funds, who ultimately determine overall or sector shareholder value. As such, it is not always corporate executives who are to blame when expectation fails to meet reality.

While managers can clearly add value to their particular company's operations and be seen to be "enhancing shareholder value" (especially in a bull market), it is the level of investor confidence in the market itself which is ultimately most important to the health of the global economy.

If the same confidence that has propelled share valuations to ever-greater heights in recent years suddenly evaporates, the process can quickly go into reverse. Determining how long the downward spiral could continue is more likely to be measured in years rather than months.

The current hope is that the series of stock market falls seen recently represent nothing more than an adjustment. The reality though, could prove far worse. Clearly, only time will tell as the world enters the new century.

Mark Payne is a former analyst at the Overseas Department of the Bank of England. He is the founder and head of MBP Research and has written some 800 published books and reports covering several business sectors.