By Azim H. Premji

If beauty lies in the eyes of the beholder, market value is based on the perception of the shareholder. What causes this perception? There is no doubt that the perception is based on a number of complex factors. I have no wish to second-guess finance whizkids who use sophisticated tools to analyse such trends. I would only like to share from my own experience as an entrepreneur what I consider to be the 3 most important factors that influence, and will, in this century, continue to influence the creation of shareholder value. The 3 factors are performance, potential for growth, and the trust that an organisation enjoys with its investors.

Typically, shareholders look forward to 2 kinds of returns: dividends and an appreciation in the market value of shares. In the last few years of the previous millennium, the appreciation in the market-value of certain stocks was of a magnitude as to reduce the impact dividends make on total shareholder value added. Thus, the focus of organisations in this century should be multiplying the market-value of shares to create shareholder value rather than distributing a higher dividend.

The first factor that influences the market value of shares is the track-record or performance of the organisation. This means not just achieving planned revenue- and profits-targets time and again, but also ensuring that the company's growth meets market expectations. Thus, the organisation's performance must exceed or, at the least, match that of the industry. Nor can this success be a flash in the pan. There is a caveat, though. It may not be able to predict a company's potential to add value either if it operates in an emerging industry-type, or if historical data is not available or not relevant.

This brings me to the second factor, which is the organisation's potential for growth. Growth depends both on the environment in which a company operates, and on its internal dynamics. The shift from a manufacturing economy to an information economy has had a pervasive effect on the environment. This millennium will be the millennium of the mind, and this is amply reflected in market sentiments. In the US, the technology sector constitutes 5 per cent of the economy, and has been growing at the rate of 12 per cent. Europe and Japan are no different. Contrast this with the growth-rate of the economy in these countries: a mere 3 per cent. Thus, the contribution of tech-companies to the growth of the economy is 20 per cent. Four of the top 10 companies in the US, in terms of market capitalisation, are infotech majors. So are 3 of the top 10 in India.

At one time, market capitalisation was linked to the physical assets of a company. Today, the 2 growth sectors-software and pharmaceuticals-indicate that this relationship is more with the intellectual capital of the company. Not surprisingly, then, the inherent optimism of continued growth sometimes overrides present performance. In the US, the market capitalisation of Net companies is higher than that of the automobile sector despite the fact that companies like Amazon. com are yet to make money. The market's perception of a company's value is a function, then, of its growth-potential.

If companies wish to capitalise on the future, they need the skills to spot an emerging opportunity while it is still emerging. And, when things change, as they normally do, the company should be able to make a mid-course correction. Both-the evidence of having successfully capitalised on an opportunity or the demonstration of being able to re-align the organisation to a new set of market-constraints-have a role to play in defining the market value of a company.

The third important factor is trust. How does one build trust between a company's management and its shareholders? Trust is built around integrity and, while it takes time to develop, it can be lost overnight. Organisations need a mechanism that will ensure that there are no lapses that will erode the trust that has been built over the years. This mechanism is corporate governance. The essence of this lies in aligning the interests of the management with that of the shareholders.

Several mechanisms of corporate governance have emerged, including the induction of a distinguished panel of professionals on the board to protect the interests of minority shareholders, the existence of an audit committee of the board to examine accounts and approve transactions between the management and the company, adherence to corporate laws which cast specific responsibility on members of the board to protect the interests of minority shareholders, and the existence of a code of conduct on trading in the company's stock by employees who hold positions of fiduciary responsibility.

Another facet of building trust is complete transparency in the dealings of the organisation. In the field of accounting, transparency has become synonymous with the US Generally Accepted Accounting Practices standards. But this is only the beginning. Transparency should result in shareholders and investors having sufficient information to make a learned decision. For this, the investor needs additional business-information of a non-accounting nature as well. Communication is the essence of building a relationship with investors. There has to be a continuous flow of information to investors from the organisation. Companies should take care to ensure that their financial reporting is neither too optimistic nor too conservative.

I am reminded of the story of a ship that was lost on the high seas. On board the ship were an optimist and a pessimist. The pessimist would get up in the morning and announce that the ship would sink that day while the optimist would declare that they would sight land that day. Everybody loved the optimist and hated the pessimist. When they could not take it any more, they threw the pessimist overboard.

However, the optimist continued to announce they would sight land soon. Evening after evening came, and there was no sign of land. Finally, they threw the optimist over-board as well. The lesson? Be realistic. Paint a realistic picture of performance and prospects to investors and the public. And, if a company's prediction is based on some assumptions, it is necessary to communicate the basis on which they are made. Any organisation that can perform consistently, spot opportunities for growth, build the organisational capability to capitalise on the opportunity, and communicate a realistic picture that builds trust will continue to create shareholder value in every sense of the word.

Azim H. Premji is the Chairman of the Wipro Group

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