Shareholder Value

Shareholder value can be defined as the value of the return that a shareholder is able to obtain from their investment in a company. This is made up of capital gains, dividend payments, proceeds from buyback programs and any other payouts that a firm might make to a shareholder.

Managers should examine a business , or parts of their business, in terms of the following questions: How much money has been (or will be) placed in this business by investors? What rate of return is being (or will be) generated for those investors? Is this sufficient given the opportunity cost of capital? These three questions can be used to examine past performance, or future plans.

Value-based management is a managerial approach in which the primary purpose is long-run shareholder wealth maximisation. The objective of the firm, its systems, strategy, processes, analytical techniques, performance measurements and culture, all have as their guiding objective shareholder wealth maximisation.

Identifying value destructive and value generating activities within a business can lead to realignment of management priorities: -Plans for the business are considered by focusing on the extent to which their current or planned business operations will create value for shareholders. That is, business operations should generate discounted cash inflows greater than the cash devoted to the investment by the finance providers. -Managers are rewarded according to the achievement of shareholder value over the long term. Large changes to incentive systems in most firms can be the result. -Often the discounted cash inflows in a part of the business amount to less than the amount that could be generated by closing down the activity or selling it. -If a subsidiary is sold, managers then need to consider whether the cash released should be invested in other activities or be given back to shareholders to invest elsewhere in the stock market?

Once an organisation becomes value based a wide range of questions becomes informed by value principles, e.g. Mergers, Strategic analysis, Capital structure and Dividend payouts

Frequently, a shift in culture, in systems and procedures as well as a major teaching and learning effort is required to create a value-based corporation.

The three steps to creating shareholder value are: Communicate the importance of shareholder value and then encourage a genuine commitment to shareholder wealth-enhancement throughout the organisation; Use good measurement techniques to evaluate whether value is being created at various organisational levels; and then manage actively to ensure that every aspect of management is suffused with the shareholder value objective.