Total shareholder return can not only be a measure of past performance, but it can be harnessed as the prime touchstone for planning future performance.
Tim Gardner is vice president and Eric Spiegel is senior vice president at Booz Allen & Hamilton. Contact Gardner at firstname.lastname@example.org.
Total shareholder return (TSR) is a beguiling metric. Return on invested capital (ROIC), return on equity (ROE), growth rates, risk adjustments, and so forth rise and fall and interact in the various ways that make financial analysis intriguing, but at the end of the day, the number that tells how well a company has done for its shareholders is TSR. Because TSR represents the ultimate bottom line of financial performance, it can’t help but command the attention of board and senior management.
On the other hand, TSR frustrates management by seeming almost random in its operation. Management may believe it is doing everything right, setting ambitious plans, executing those plans and meeting its forecasts, yet find that its TSR is no better than average. Meanwhile, the highest TSR in its peer group is likely to be posted by a company that was in trouble no more than a year ago. It all seems unfair.
Management can be forgiven for concluding that TSR is unpredictable, owing more to the latest investment fad than to any rational assessment of company performance.
TSR is a paradox among financial metrics—dominant in assessments of past performance yet peripheral in plans for future performance. This paradox can be resolved. Just as TSR serves as the ultimate arbiter of past performance, it can be harnessed as the prime touchstone of planning for future performance.