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Chapter
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1
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Introduction
to Shareholder Value
Shareholder
value focuses on managing corporate and business cash flows
in order to optimize the risk and return of shareholders.
Shareholder value requires managing the system of value-creating
activities within a business in alignment with an overall
vision. |
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2
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What
is Shareholder Value?
"Economic
Value Added"("EVA") and a cash flow perspective
give quite different insights and results from accounting
profit. To assess value creation requires analysis of value
and cost drivers, performance drivers, critical success factors,
and life cycle effects. |
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3
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Evolution
of Shareholder Value
Shareholder
value management came out of financial theory, economics,
and strategic management. It is used by major corporations
to manage corporate and business performance. Increasingly
its ideal application gives equal weight to both quantitative
and qualitative analysis.
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4
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E-Dimension:
Shareholder Value
Strategic
investment decisions are one of the main vehicles for shareholder
value creation. The investment process requires close integration
of strategic and financial analysis, otherwise the resultant
Net Present Value (NPV) can prove illusory. Focusing on shareholder
value entails careful testing of competitive assumptions together
with a thorough exploration and testing of options.
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5
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The
Global Dimension
Financial
resources and business assets need to be managed on a global
basis. Acquisitions are a major vehicle for mobilizing corporate
resources to deliver value, but frequently end up destroying
rather than creating value. The case of BMW's acquisition
of Rover is a classic example of how over-enthusiasm, a lack
of understanding of the strategic drivers, and misguided implementation
can destroy shareholder value.
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6
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The
State of the Art
Strategic
value drivers like PEST factors and Porter's five competitive
forces shape shareholder value creation to a major extent.
The cost of capital depends on a company's risk premium and
capital structure. Financing strategies can be elaborate and
esoteric. In the future, there is potential for refinement
of approach - seeking to quantify less tangible investment
in the business. |
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7
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Shareholder
Value In Practice
The
BP Amoco case highlights that shareholder value needs to become
top management's central concern and that its implementation
can take a number of years to realize its full benefits. The
IDV case suggests that managing for value yields important
insights about business issues and choices, typically changing
resource allocation. But again, it requires considerable culture
shift.
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8
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Key
Concepts and Thinkers
The
first wave of writers included Rappaport, Reimann, Bennett
Stewart, Copeland et al. and McTaggart et al. These early
thinkers concentrated principally on financial economics and
on quantification, with the exceptions of Reimann and McTaggart
et al. , who took a more balanced approach. |
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9
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Resources
There
are numerous sources of data about companies' performance
in generating shareholder value in the US, in Europe, and
more specifically in the UK (for example, London Business
School).
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10
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Ten
Steps to Making Shareholder Value Work
There
are 10 key ways of destroying shareholder value: mission statements,
going for growth, acquisitions, investment business, creeping
business complexity, cost management, poor leadership, and
corporate learning. Each one of these areas needs skillful
management to avoid management decisions and behaviors which
will destroy shareholder value. |
