Back to podcast

Myles Corson 

Hello, I am Myles Corson from EY and you’re listening to The Better Finance Podcast. A series that explores the changing dynamics of the business world and what it means for finance leaders of today and tomorrow. By sharing insights from global leaders on key topics affecting the world of corporate finance. 

In this episode, Christopher Volk, Author of the book The Value Equation – discusses how his formula provides a roadmap to how companies are able to create wealth through strong business models. 

I’m excited to share this discussion with you. So, let’s get started! 

Corson

Christopher, thank you so much for joining us today on The Better Finance podcast, we're delighted to have you as a guest. As we get started, if you could share a little bit of your background for our audience and how you ended up where you are today.

Christopher Volk 

I started my career in commercial banking in Atlanta, Georgia, and when I was in commercial banking, I learned quite a bit about analyzing financial statements. I started learning a lot about business models, and corporate finance and a lot about accounting, of course And From there, I went to a real-estate financial services company here in Arizona, where I'm talking to you today. After a while, I suggested to the founder of the company that we take it public, which I led taking that company to public. It was a real estate investment trust. And we listed it in 1994 and I became the president of the company after that sometime. Through that company we sold it to GE Capital and after that, I actually started two more successive similar real estate financial services companies, and conceived and co-founded them and listed them on the New York Stock Exchange. All these companies outperformed broader benchmarks of indices and in fact, I think all them approached or beat the S&P (standard and poor’s) 500 as well, and counted investors that were pretty interesting. We had people from Berkshire Hathaway, the shareholder, to some of the largest institutional investors in the world. I left that to write books and to talk about how businesses create wealth.

Corson

It's such a great experience to pull from. As you mentioned, part of the reason that we're here today is to talk about a book you've written called “The Value Equation” and clearly, one of the things we talk about a lot on the podcast is the role of CFOs (Chief Financial Officer) and senior finance executives in helping to create value for their organizations. So I was really keen as we start, to just

understand, you know, what was the background to you writing that book on “The Value Equation”?

Volk

“The Value Equation” centers on an approach that we used at the companies that I led, where we would calculate the wealth that were creating for our shareholders and then we would disclose that wealth to shareholders in our regular disclosure statements. My view became that wealth creation was far more important than typical earnings metrics, like earnings per share, that often times CFOs and CEOs (Chief Executive Officer) like to use to bench themselves. So things like earnings growth, earnings per share just aren't as important. You can think about “The Value Equation” as a book a road map to how the most successful companies got that way from financial perspective. And even how the richest people in the world got that way, because it all centers on financial business models, and being able to create wealth by wrapping your customer solutions into an elegant business model.

Corson

In the book, you discuss how to take the focus from the hundreds of variables that many organizations look at down to six that you describe as having the greatest impact on business. So, can you talk a little about what those key metrics you've identified and defined were, and how they can help CFOs in running their organizations?

Volk

Any company can be boiled down into six key variables, but I'm gonna just start with four, because the first four are the most important. And the first four variables combine to give you what I would call an unlevered equity return. And the very best business models out there have the highest unlevered equity return. So, if you forget the capital stack for a second, if you can peel that back and just focus on the raw business without the capital stack, you're looking for the highest rates of return with basically zero debt, or zero use of leases. And so, the first two variables are sales and operating profits, and these are variables you wanna maximize. And that's what I would call operating efficiency. The second two variables relate to asset efficiency, which is basically the amount we have to invest in the business to create it, and then the amount you have to annually spend on that business to maintain it. But more than that, the amount you may lose on business investments that you're making, that's the variable you want to minimize, those two variables you want to minimize. So, you maximize the first two, minimize the second two, and then the last two variables are just really layering on the capital stack, the percentage of funding with debt and leases, and the cost of that money if you're levering that on to create a levered return on equity. And the idea is to maximize that return and optimize your capital stack. So, you maximize the first two, minimize the second two, optimize the last two.

Corson

That's really helpful in terms of understanding the concept for “The Value Equation.” Can you talk a little bit more about how CFOs could take those six measures and translate them into actions and what they need to be doing to help create that value?

Volk

If you're the chief financial officer of a business, it's really important to be able to dissect your business model, even at a high level, even if you're a very large company, dissect your business model and understand where those six variables are. And then to be able to track those variables over time, see which ones are moving. And as you do this, then what you can do is drill down into the variables, because each one of the variables has lots of other variables. If you're focusing on sales, there's tons of variables that go on behind sales. If you're going into operating profit margins, there are all kinds of variables that can go behind that. “The Value Equation” is a simplification. But behind the simplification lies the truth.

Corson

As they say, simplicity is the ultimate sophistication. So, this idea of simplifying down, I think, is really important. Do you think simple business models can really deliver exceptional performance? 

Volk

The exceptional performance is driven by the components of those simple business models and those components interact with each other in different ways. The goal of a company for a chief financial officer is to make the company worth more than it cost to create, and to really make the equity worth more than the cost to create. You can only do that if you have a financial model that delivers returns that are higher than what typical investors would expect for a company with that kind of risk dynamics and growth profile. And most companies in the world actually don't rise to this most companies are worth basically what they cost to create, maybe even a little less. So, there are jobs for employment creation. But the most successful public companies are all worth more than they cost to create, because they have exceptional business models and those business models are created by having tremendous moats, being able to create pricing, create margins that are high, operating scales of efficiency, having the efficiency get better over time and improving your profit margins, having very attractive of costs of outside capital, controlling business investment, sometimes having an asset-light model. All these things work in concert to create it and the thing is, you don't have to have the best business model in the world. You don't have to have perfection. There are some businesses that I would say come close to perfection, but the companies I ran did not have business models near that good, but we were still able to create a substantial amount of shareholder wealth in excess of what the cost that equity was. So, we were able to create wealth by having a very solid business model with the variables that we had in our control.

Corson

One of the things we talk about a lot with CFOs’ responsibilities is obviously, the resource allocation and investing in the right areas. But I think what you're advocating is, by understanding your business model and making sure you allocate your resources effectively in line with those drivers, that is what delivers the out performance. Is that a fair summation?

Volk

No question, I mean, that's the free enterprise system at its best, right? So, it's all about allocation of resources and trying to do them as efficiently as possible. If you're a business leader, you don't wanna overspend on business investment, because if you overspend on business investment, then you have to fund that with equity. You have to fund that with other borrowings. So, you want to keep that as tightly as you can keep it. You don't want to have a situation where you're limiting your sales or you're impacting your operating margins. So all this stuff works together and the companies that I ran were all investment grade, ultimately they were investment grade companies with access to investment grade debt. Our cost of borrowings were very inexpensive, but you don't have to even do that. I mean, a lot of companies have made a lot of money having comparatively high costs of borrowing. So, the issue is to work all these variables together with one another to create the most shareholder wealth possible.

Corson

You mentioned shareholder wealth, so maybe let's kind of broaden out a little bit and talk about, in your view, how can CFOs balance the need to create sustainable value for all stakeholders as well as the need to generate profits for shareholders.

Volk

The number one stakeholder for all of our companies is customers. Initially, all companies are solving problems for customers, that's why they exist to begin with. And so, customers are the first and foremost stakeholder that exists, you wouldn't be there without them. The second stakeholder that's important is the shareholder, because you couldn't start a company without a shareholder, This couldn't exist. So, as we would go to raise money to start our new companies and create those companies, the amount of shareholder returns that we had the potential to deliver was really important in being able to attract capital. I would say that it's important to attract continued capital as one of my mentors used to say, availability capital's everything, and that really starts with having a business model that can deliver shareholder returns. The other stakeholders that are there, which includes employees and suppliers and credit providers and all the communities that these companies serve, or our companies serve, they are incredibly important. But they can be served best if you can get to the first two stakeholders, customers and then having a solid business model. And so, the companies that have the best business models do an amazing job helping all the other stakeholders. And companies that have bad business models have a hard time dealing with all the other stakeholders and doing well by them in terms of, if you're an employee getting career progression and what your opportunities are in the future, how much you get paid. All that stuff can be improved a lot if you have a very strong business model, and are delivering wealth for you shareholders.

Corson

You explain in the book how culture is essential to create sustainable value and foster employee engagement. What, in your view, is the best way to develop a really, a high performing corporate culture and is there anything specific you think finance leaders need to be doing in that area?

Volk

I think that often times, when I talk to business leaders about corporate culture, they talk about the personality of a company, and they talk about team building exercises and things that the company works for as they go together, especially if they're helping other stakeholders with their communities. And I think all that stuff is just amazingly important. But, for me, corporate culture really starts with communication. And communication doesn't exist without trust. You're wanting your employees to always feel free to say what works and what doesn't work. We're almost wired not to do this. We're afraid to speak our mind, we don't want to appear negative in any way. And the second thing, if you want them to be able to say, here's the solution to a problem. I'm not just telling you what the problem is, but I actually have a solution to it. Employees are also wired not to really do that, because they're afraid of not being up to the task, they're afraid of offering up a solution that perhaps isn't ideal. So, as business leaders, what we want to do is to get our employees to feel amazingly comfortable to be able to deliver this and give us input. And so, as the CFO of a company, this is really critical, because as you're looking and trying to maintain the quality of your company and the value of your company, you're always focusing on the six variables and invariably, the work that you're doing to re-engineer or to adjust your company in a way to improve shareholder performance revolves around one or more of the six variables. And it traverses the organization, it's not just in the silo here or a silo there, it's across the entire bailiwick. So you want your employees to be able to feel free to talk about it and then you want to be able to get them in the room across department boundaries, irrespective of departmental boundaries and get the right stakeholders in the room to solve the very big problems, the very big opportunities that companies have, to be able to create shareholder wealth. And that is definitely at the core of what CFOs are interested in doing.

Corson

Some great points there, and the need to be building cross functional teams and the agility that's required to respond to very demand markets is key. But I think your point around transparency, leaders need to create a culture where the people are comfortable explaining what the challenges are, because I think it's one of the great paradoxes of leadership, the higher up you get, the further removed you get and the more difficult it can be to understand what is actually happening directly at the coalface. You know, your people, the people probably most connected are with your customers in many cases, or the operation.

Volk

Totally. One of the ironies is that sometimes, in the organizations that have the most positivity emanating out of the organization, so the organization has a lot of positivity, sometimes behind the positivity is, people afraid to really say what they think, because they're afraid to disrupt the positivity and in fact, have organizations being run by just a handful of people at the very top. And that's not really what you want, you want to have organizations that are flatter, more inclusive, that are able to extract the best ideas from a wide array of constituents.

Corson

So, what you've articulated is like many of the great ideas, very self-evident and seems very simple, in theory. Actually, executing it can be challenging and complex. What are some of the reasons you think it's taken people so long to really focus on the principles around value creation and for these kinds of viewpoints to get traction?

Volk

I think conventional wisdom dies hard. I think that your average company is today, still measured by earnings per share. Earnings per share is an inadequate measurement, so it's very possible for companies to generate tones and tones of cashflow and reinvest that cashflow in the business. With the CFO, what you want to do is not just reinvest the cashflow into the business, you want that cashflow to be worth the same or more than it cost. I mean, you don't want light any of that money on fire. Now if you reinvest the cashflow in the business and let's say half of it works, so you get some traction on half and the other just goes away, you'll still get earnings per share, but you will have destroyed value in the process of getting earnings per share. And I think that we still have, if you're looking at the broader array of benchmarks out there, you still have benchmarks that are focused on using imperfect mechanisms, when CFOs are really wise to focus on what I call EMVA, which is Equity Market Value Added, which is the amount your equity is worth more than it cost to create. And I think that that's so important and all the rest of it will take care of itself. So, I think that these ideas have sort of taken hold, if you look at some of the institutional investor consulting services, they focused on value creation to some degree, but it's still, even today, I think it's still embryonic.

Corson

And are there any particular strategies do you think companies can use to create sustainable value for all stakeholders?

Volk

You know, I think sustainable value is always centered in the business models of businesses. And in some cases, you have companies that have radically transformed business models, which could be a risky proposition. And it takes a lot of work to be able to take companies and hone them over time. As companies exist, you have disruptors like Sears and Roebuck that came out at the time of the railroads and disrupted retail by being able to buy a house even from a catalogue. Nobody had catalogues back then. So, companies can lose their way, they can cease to have traction with their business models. They cannot redefine themselves, or they can have a hard time redefining themselves. And I think that the challenge in businesses is to be aware of that frailty that all businesses have. That vulnerability that businesses have, and to address it head on, and be clear minded about it.

Corson

If you had any sort of closing thoughts, symptoms, recommendations to CFOs and finance leaders to really advance this, what would your words of advice be?

Volk

One suggestion might be that you'd buy my book, which is “The Value Equation.”

Corson

Links will be in the podcast webpage, absolutely.

Volk

I think that's important. I was inspired in doing this by the notion of economic value added, which is probably something that your listeners are familiar with. And that was started by Stern Steward in a book called “The Quest for Value”, I think. And what I decided over time is that really as the CEO of a company, I'd spend less time time focusing on my cost per capital, which is a typical thing that they will tell you to do, and I focused much more on my cost of equity and what I could do for a return on equity perspective. And to do that, you really have to be very understanding that you have the liability stack pretty well designed. So, if you think you have a liability stack that's optimally designed, then you can really start turning your attention to what you're doing for shareholders, in terms of return equity. And that's where you can help all of the other stakeholders of a company. And as you point out, I mean, that's where free enterprise gets really virtuous, because it's a win-win-win situation where you're able to help everyone and the business model stands at the center of that and return on equity is so important to be able to get that to happen.

Corson

Let's just go to some quick rapid-fire questions, Christopher, just on, you know, your thoughts. 

Volk

Corson

In terms of quotes, anything that you refer back to or you use in your personal reflections?

Volk

Well, our first chairman, who was one of the earlier people on the beaches of Normandy during D-Day, said to me that availability capital's everything and you should just get it if you can afford it and I always followed that. And I issued stock at prices that I didn't like from time to time, but if we could afford it, we did it. No company ever goes out of business because they lose money, they go out of business because they run out of cash. So, the capital piece is so important. And then I lived my life by just a personal credo, which is either you make things happen or let, things will happen to you. And so, I think it's important for all of us to try to make things happen. And if you don't make things happen, things will happen to you.

Corson

Is there anything you do to maintain wellbeing and balance. Obviously, we're all under a lot of pressure, but any things you do particularly to keep balance?

Volk

Work is very consuming, so it's really important to take some time away and I was a very big believer in taking all the vacation I could take. And to use that time to either read or flyfish, or do other things to make you concentrate heavily, but on something completely different, so that you unwire your brain for a while. And if you can do that, then you can come back to work in a way that is very refreshing and look at your business with new and fresh perspective. That’s what time away does.

Corson

Yeah, allow the subconscious to do its processing. That’s great.

Volk

Totally.

Corson

Are there any particular emerging technologies that you see having a major impact or opportunity for finance?

Volk

Well, I think in finance, the emerging technology to look out for today is artificial intelligence (AI). None of us really know exactly where it's going to lead, but I know that in financial services, hopefully, it will help you make faster, more consistent, better decisions. And being able to make consistent decisions is so key. I know all of us in business can look back at our careers and realize our decisions were not always consistent. There might have been less shades of good but were not always consistent. Hopefully, AI can be constructive in that fashion, and I look forward to seeing how it gets used.

Corson

Well, Christopher, really appreciate you taking the time to join us today, sharing your insights. So, thank you very much.

Volk

Well, Myles, it's a pleasure to be here and I thank you so much for taking the time to talk to me.

Corson

If you’ve enjoyed this or any episode of the Podcast, please leave a raving review, and don’t forget to subscribe so you don’t miss out on future episodes. 

You’ll find related links in the shownotes or at ey.com/betterfinance

As always, thank you for listening and I look forward to speaking next time on The Better Finance podcast.

Back to podcast