When successful entrepreneurs and investors articulate the principles underlying their success, they make a powerful case for free markets and principled entrepreneurship.
It’s critically important for business leaders to speak out in defense of free markets. And when they do, it’s an attractive opportunity to learn directly from the voice of experience.
If businesses focus on value creation, it will maximize shareholder value as a result.In his latest book, Value Creation Thinking, investor and entrepreneur Bartley J. Madden acknowledges the insightful work that John Allison, Charles Koch, John Mackey, and T. J. Rodgers, among others, have done along these lines. Value Creation Thinking is an excellent read in that tradition, and it enriches the genre in three important ways.
First, the book presents a unified vision of the topic of value creation from five distinct perspectives: economic principles, business strategy, organizational management, financial valuation, and business ethics. There are many books that focus on one or a few of these areas of interest, but Value Creation Thinking draws the connections among all five.
Second, it goes into considerable depth and technical detail, making it particularly worthy of interest to business school students and professors, business managers, and investors. They will benefit from Madden's guidance on building a successful and ethical business.
Third, Madden creates an analytic framework that is highly original and challenges conventional wisdom. At the same time, it is well worth studying because he has a long track record of investment success that uses that framework.
Each of the five disciplines (business economics, strategy, organization, finance, and ethics) is centered on a concept of “value.” Discussions of these disciplines often assign incompatible meanings to that word. To Madden, value creation is centered on a proper understanding of the purpose of the firm and management’s core responsibilities. This is the unifying principle in his discussion.
The Compelling Vision
Madden vigorously disputes the notion that the purpose of the firm is to maximize shareholder value – practically an article of faith among free-market economists and equity investors alike.
That notion is useful for financial economists building mathematical models. But firms operate in the real economy of goods and services, so it is essential to view the maximization of shareholder value as the result that a firm will deliver in the financial markets if it achieves its correctly-defined purpose in the real economy.
Pursuit of that purpose requires a firm to have a compelling vision, instill high ethical standards, create customer loyalty through efficiency and innovation, reward long-term investors, provide value to all who partner with it in serving customers, and care for future generations.
If business leaders try to manipulate value in the financial markets directly, it leads to no end of mischief.If the firm gets that right, it will generate enormous benefits to society and it will maximize shareholder value as a result. But when business leaders take their eyes off that ball and try to manipulate value in the financial markets directly – for example, by incentivizing employees to do whatever it takes to meet or beat Wall Street’s quarterly earnings expectations – it leads to no end of mischief.
To accomplish the firm’s purpose, management’s core responsibilities are to integrate a useful valuation framework (hint: this is not “meet quarterly earnings expectations”), use resources efficiently, organize for continuous improvement, and create a knowledge-building culture.
It is not surprising to Madden that economists find it hard to convince a skeptical public of the virtues of free markets. Too often, they are unclear in their own minds that the purpose of the firm is to create value in real (not financial) terms, which will necessarily generate both benefits to society and returns to shareholders as a result.
Much of Value Creation Thinking is devoted to in-depth discussions of the means by which management can meet its core responsibilities, in particular the interaction between Madden’s valuation framework, the thought processes that deliver efficiency and continuous improvement, and the principles of a knowledge-building culture (a concept that will surprise no one who is familiar with Hayek).
Much of this knowledge-building material is based on his last book, Reconstructing Your Worldview. A previous book, Free to Choose Medicine, presents an application of his innovative systems thinking to a life-and-death public policy issue.
Madden, a mechanical engineer by training, was a partner in several firms that invested on the basis of these insights, sold related data services to other portfolio managers, and provided consulting services for corporate clients.
Thus, the principles that he has articulated in Value Creation Thinking have in fact delivered demonstrable value over a period of decades. Any student of economics, business strategy, organizational management, financial valuation, or business ethics would gain from studying them.
Madden has created a website where he provides a Powerpoint summary of the book and related educational videos.