Ten Ways to Create Shareholder Value
The value delivered to shareholders because of management's ability to grow earnings, dividends and share price. In other words, shareholder value is the sum of all strategic decisions that affect the firm's ability to efficiently increase the amount of free cash flow over time. Some managers and investors obsessed with next quarter’s results, failure to invest in long-term growth. The author set out ten basic governance principles for value creation, which will help companies with a sound, well-executed business model to better realize its potential for creating shareholder value. Overall, Three main concepts have been discussed in this article.
Firstly, focus on long-term value creating instead of short-term earnings. Because shareholder value is driven by long-term free cash flows to equity holders and it can be created when long-term returns is higher than cost of capital. In other words, high earnings do not always create shareholder’s value. For example, A company invest at rates below the cost of capital or forgo investment in value-creating opportunities in an attempt to boost short-term earrings cannot meet investor expectations. Lower expectations will decrease stock price and shareholder’s value at the same time. Secondly, reduce the capital they employ and increase value by focusing on high value-added activities and by out-sourcing low value-added activities. For example, Ford Company designs their cars in American but manufacture in China. And then there’s Amway’s well-chronicled direct-to-customer business model, which minimizes the capital the company needs to invest in a sales force and distribution, as well as the need to carry inventories. The last concept is providing investors with value-relevant information. Better disclosure of finical report not only offers an antidote to short-term earnings obsession but also serves to lessen investor uncertainty and so potentially reduce the cost of capital and increase the share price.
What I am surprise in this article is that acquisition can create value faster than any other corporate activity. Although M&A is one of the quickest paths to growth, it’s not the surest and shareholders do not get the enterprise value promised from the deal. Deals are inherently complex and laden with risk, whether they occur domestically or in a foreign market. Valuations are complicated by clarity of cash flows, complex accounting rules and tax legislation. And integrations are difficult to execute. Moreover, EPS, as the index that companies and investment banks most considered, will pose an additional problem on top of the normal short-comings of earnings when it comes to exchange-of-shares mergers. However, as mentioned in article, M&A deals are based on their prospects for creating value, not on their immediate EPS impact, as long as management can identify clearly where, when and how it can accomplish real performance gains by estimating the present value of the resulting incremental cash flows, they can make acquisitions maximize expected value, even at the expense of lowering near-term earnings.
In the article, the author mentions that earnings have no connection with shareholder value or change in value. I don’t agree with this idea. Earning shows performance of company in current year. It’s one of the main reasons for people who don’t have too much financial knowledge decided whether buy or sell their stocks. The value of company is depends on the expectation. If the earnings of a company