Sustainability of German companies?

How the board of management can manage its divisions in the manner of a strategic investor

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Stern Stewart & CO. GmbH
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80333 Monaco

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MANAGEMENT SUMMARY

In the current reporting season, most of the DAX stocks have once again exceeded the quarterly targets they set for themselves. While the stock exchange tabloid hacks talk about an “impressive trend,” and forecast further upward movement, a recent study that we undertook ourselves shows that the outlook is certainly not entirely rosy.

Exceeding one’s own expectations is one thing; from an economic perspective, however, it is necessary that the profit increases satisfy at least the capital market expectations already factored into the current company value. And it is precisely here that we come up against a major discrepancy: the better the results are, the less obvious it is where the performance improvements expected by the capital market, which on average now already constitute more than 40 percent of total company values, should actually come from. The nature of the gap between what is required and the reality (results gap or confidence gap), defines and quantifies the economic challenge faced by every company – and, consequently, the issue of sustainability.

As different as the results gap and the confidence gap may be in terms of their causes, the outcome for the company management is a radical reorganization of the process of goal-setting and of strategic allocation of funds. In the study, we reveal how the board of management – based on knowledge of the level of expectations of the investors – can take on the role of a strategic investor, and can distribute the expectations among the company divisions, and also how, by means of the goal-setting process, it can implement the strategy that has the greatest intrinsic value.


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