#19:What is corporate value creation?

NVIDIA recently became the first company in the world to cross the $4 trillion mark in market capitalization. Nearly equivalent to Japan’s GDP, this figure is truly staggering. When compared with government budget revenues, $4 trillion is on par with China’s revenues and more than double those of Germany and Japan. This means that if NVIDIA were sold today, the proceeds would be enough to support either China or Germany and Japan combined for an entire year. Also, since the total market capitalization of all companies listed on the Tokyo Stock Exchange is approximately $6 trillion, the combined value of all listed companies in Japan is equivalent to one and a half times the value of NVIDIA. All of this makes one wonder—is it possible to justify a single company being worth this much? With NVIDIA’s price-to-earnings (P/E) ratio around 30, which is quite high compared to the S&P 500 average of approximately 20, some believe that 30 is a bargain considering NVIDIA’s potential for future growth. Furthermore, with NVIDIA supporting the advancement of generative AI, which is ushering in a new industrial revolution globally, many anticipate its stock price will increase further. This is backed by the narrative that NVIDIA is leading the AI supercycle.

The value of a company can be gauged by either examining its net assets or using a method such as the discounted cash flow method to calculate the present value of its future expected earnings. Meanwhile, for listed companies, you can simply look at and make comparisons based on market capitalization, which is the value of a company as assessed by the market. Following the Enron scandal of 2001 and the 2008 financial crisis, the notion that shareholders are not the only stakeholders with an interest in corporations began gaining traction in the U.S., leading the Business Roundtable to issue a statement often referred to as the “stakeholder capitalism declaration” of 2019. This declaration stated that in addition to ensuring returns to shareholders, corporations should commit to—among other things—providing their employees with greater job satisfaction, improving customer satisfaction, contributing to local communities, and reducing their environmental impact. The concept of Sanpo Yoshi (“three-way satisfaction”), a business philosophy of the Omi merchants, had already long existed in Japan. While this led some Japanese executives to remark that American companies were finally embracing this kind of balanced approach, I see it as a beautiful misunderstanding. In Japan, many companies are unable to provide their shareholders with adequate returns, making this an area where they lag behind their U.S. counterparts. Conflicts of interest do not necessarily exist between shareholders and other stakeholders. The only true conflict is between short-term greed and long-term value creation.

The other day I watched a Kamigata Rakugo (a traditional form of Japanese comedic storytelling originating from the Kamigata region, which encompasses Osaka and Kyoto) performance of Senryo Mikan by Kichiya Katsura. The story is set at the height of summer, sometime in the Edo period. The young master of a kimono shop falls ill, nearly on the verge of death. When the cause of his illness is finally revealed, we learn that his insatiable desire to eat a mikan (Japanese mandarin) has driven him to the point of a complete mental breakdown. The senior master directs the shop clerk to go out and do whatever it takes to find a mikan for the young master. The shop clerk runs all over Osaka in search of one until he miraculously finds a single mikan at long last. As it is summer and mikan are out of season, he is told it will cost 1,000 ryō*1 for just one. Believing the life of the young master to be priceless, the senior master agrees to pay the full asking price of 1,000 ryō. After eating seven of the ten mikan segments, the young master recovers from his illness. With tears in his eyes, he thanks the shop clerk, handing him the remaining three segments and saying, “Please eat these together with my father and mother.” The punchline to this story is that the shop clerk is so giddy over the thought that these three segments are worth 300 ryō that he runs away with them. Despite already knowing the story, I was tremendously impressed by the skill with which Katsura delivered it.

The role of a company is to become a value creation machine capable of facilitating a sustainable spiral in which it provides innovative value to society, earns cash in return for that value, shares that return with its stakeholders, and makes investments toward further growth. Once investors feel confident about a company’s role—in terms of both future cash flow figures and from a forward-looking narrative perspective—its stock price will rise, and market capitalization will grow. NVIDIA is the perfect example of this. A company’s ability to consistently increase market capitalization depends upon the value it generates being widely recognized by society. If a company disregards its various stakeholders, it will be unable to provide continuous value or increase its stock price. However, it is by no means easy for a company to maintain a value creation cycle. Companies must possess dynamic capabilities enabling them to identify society’s present and future needs, develop unique ways to meet those needs, and transform themselves as necessary. Self-transformation achieved through optimized allocation of management resources must serve as a trigger for creating further unique value. Even if you run away with three segments of a mikan, no one will pay you 300 ryō for them. The value something holds for one particular person does not necessarily correspond to its value in society or the market. Short-term greed is vastly different than long-term value creation.

Note 1: Ryō is the standard unit for currency in the Edo period in Japan. 1000 ryō is roughly considered to be equivalent to over one million US dollars.