Business
Maximizing shareholder value
Maximizing shareholder value refers to the goal of increasing the wealth of a company's shareholders through strategic decision-making and operational efficiency. This involves prioritizing actions that enhance profitability, increase stock price, and generate higher returns for investors. Companies often focus on maximizing shareholder value to attract and retain investment, ultimately driving long-term growth and success.
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6 Key excerpts on "Maximizing shareholder value"
eBook - PDFChurchill's Horses and the Myths of American Corporations
Power, Stakeholders, and Governance
- Mord Bogie(Author)
- 1998(Publication Date)
- Praeger(Publisher)
Part II Shareholders How the value of the investment of the shareholders of public cor- porations is maximized, measured, and distributed; why public cor- porations exist. Chapter 5 Corporations Maximize Shareholder Value by Maximizing Current Profit We presumed that the first purpose in making a capital investment is the establishment of a business that will pay satisfactory dividends and preserve and increase its capital value. The primary objective of the corporation, therefore, we declared, was to make money, not just motor cars. —Alfred P. Sloan, Jr., CEO of General Motors 1 The most basic reason for existence of the enterprise is to use the capital of the owners to their maximum gain. —Pearson Hunt, Charles M. Williams, and Gordon Donaldson, Basic Business Finance 2 As shareholders of public corporations, we’re skating on thin ice. We’ve found that not only is the board of directors essentially irrelevant—the board that is supposed to govern the corporation in our interests—but also the stock market that is supposed to reflect the value of those interests. The board can’t be relied on to control the corporation, and the market can’t be relied on to measure shareholder value. Churchill’s Horses are running away with their owners’ investment. Only they really aren’t. The saving grace, from the shareholders’ point of view (and what other point of view is legitimate?), is this: Public corporations are run for profit. They have no other goal. Their managers may use this profit to enhance corporate wealth rather than shareholder wealth, as Gordon Donald- son found, and they may prefer to reinvest it in the business rather than distribute it to the shareholders, as Alfred Chandler concluded. But profit is profit. Whether you regard it as corporate wealth or shareholder wealth, it still amounts to earn-
eBook - PDFThe Executive Guide to Boosting Cash Flow and Shareholder Value
The Profit Pool Approach
- V. Rory Jones(Author)
- 2008(Publication Date)
- Wiley(Publisher)
We need to be unequivocal in asserting this viewpoint; it is the cor- nerstone of all the insights, tips, and even philosophical outlook that you will read in this book. It is true that there are other possible objectives for businesses, but for most, this is the overriding reason for their existence. Certainly for public companies, management has this one fiduciary respon- sibility (in addition to certain limitations and guides, such as operating in accordance with the law and other ethical obligations). The exceptions may only exist in privately owned businesses, where owners might decide to operate toward one or more other objectives—for example, a physicians’ practice, where there may be a number of philanthropic or other motives that exist among the ownership group. Even here, though, it is unlikely that investor returns is not one of the principal objectives. Deliver Great Returns and the Rest Will Maximize Investors and business managers are in business to make money, and they should not be shy about it. In fact, one of the most socially compelling ideas about maximizing investor returns is that it comes with superior performance 7 8 The Shortcut to High Performance in all other areas—in product markets, in employment markets, in supply markets, in addition to the capital markets themselves. Notably, and con- versely, success in those noninvestor areas drives investor returns. The sys- tem is optimized, such that noninvestor areas are all maximized, only as long as the overriding goal is to maximize investor returns. Today, most people call this view of business performance “managing for shareholder returns” or “value,” referring to the equity investors (share- holders) in the business. We discuss this singling out of equity investors, in contrast to debt holders and other investors, in the following section.
eBook - PDF- Aswath Damodaran(Author)
- 2014(Publication Date)
- Wiley(Publisher)
12 Chapter 2 THE OBJECTIVE IN DECISION MAKING stake in the business, or even more narrowly as maximizing the stock price for a publicly traded firm. The potential side costs increase as the objective is narrowed. If the objective when making decisions is to maximize the firm value, there is a possibility that what is good for the firm may not be good for society. In other words, decisions that are good for the firm, insofar as they increase value, may create social costs. If these costs are large, we can see society paying a high price for value maximization, and the objective will have to be modified to allow for these costs. To be fair, however, this is a problem that is likely to persist in any system of private enterprise and is not peculiar to value maximization. The objective of value maximization may also face obstacles when there is separation of ownership and management, as found in most large public corporations. When managers act as agents for the owners (stockholders), there is the potential for a conflict of interest between stockholder and managerial interests, which in turn can lead to decisions that make managers better off at the expense of stockholders. When the objective is stated in terms of stockholder wealth, the conflicting interests of stockholders and bondholders have to be reconciled. As stockholders are the decision makers and bondholders are often not completely protected from the side effects of these decisions, one way of maximizing stockholder wealth is to take actions that expropriate wealth from the bondholders, even though such actions may reduce the wealth of the firm. Finally, when the objective is narrowed further to one of maximizing stock price, inefficiencies in the financial markets may lead to misallocation of resources and to bad decisions.
eBook - PDFSustainable Success with Stakeholders
The Untapped Potential
- Sybille Sachs, Edwin Rühli, Isabelle Kern(Authors)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
The basic of value-based management is the shareholder value, meaning the dividends and the share price. From this perspective, projects and also whole strategies are judged on the basis of the economic benefit they generate for the providers of capital. If there is a choice among several strategic alternatives, the choice is made for the one promising the greatest increase in shareholder value. As already mentioned in Chapter 1, shareholder value-based management is a highly accepted practice in the USA, and in recent years has also gained increased importance in Europe. As its premise, this approach sees all the owners (shareholders) as having the same uniform interest regarding increased value. However, in reality this is often not the case. The interests of individual share- holder categories are known to be as divergent as those of owner and management. Shareholders may have long-term and entrepreneurial interests, like the shareholders of a family corporation; or they may follow short-term speculative interests, like day-traders. The latter try to recognize daily variations and to exploit them, which is why they make only short-term investments. In between lie many degrees of variation. Managers might be interested in a one-sided develop- ment of the share value, if their remunerations are linked with it. In addition to short-term success, institutional investors also often have the protection of their investment in mind; and business partners may invest in corporations in order to maintain their primary suppliers or customers. This is confirmed by Stout: 6 Different shareholders have different time frames, different tax concerns, different attitudes toward firm-level risk due to differ- ent levels of diversification, different interests in other investments that might be affected by corporate activities, and different views about the extent to which they are willing to sacrifice corporate
eBook - PDF- Joseph R. DesJardins, John J. McCall(Authors)
- 2014(Publication Date)
- Cengage Learning EMEA(Publisher)
As a result, “students believe the primary purpose of the corporation is to maximize shareholder value, and they believe this is how current corporate leaders behave when they are making business decisions.” 1 In my book The Shareholder Value Myth , I demon-strate how this “shareholder primacy” theory can be hazardous to the health of investors, companies, and the public alike. 2 Shareholder value ideology in fact is a rela-tively new development in the business culture. It is not supported by the traditional rules of American corporate law; is not consistent with the real economic structure of business corporations; and is not supported by the bulk of the empirical evidence on what makes corporations and economies work. Indeed, there is good reason to suspect that focusing on “shareholder value” may in fact be a mistake for most business firms. This is because there is no single share-holder value—different shareholders have different needs and interests depending on their investing time frame, degrees of diversification and interests in other assets, and perspectives on corporate ethics and social responsibil-ity. Shareholder value ideology focuses on the interests of only a narrow subgroup of shareholders, those who are most short-sighted, opportunistic, willing to impose external costs, and indifferent to ethics and others’ wel-fare. As a result shareholder value thinking can lead man-agers to focus myopically on short-term earnings reports at the expense of long-term performance; discourage investment and innovation; harm employees, customers, and communities; and lure companies into reckless and socially irresponsible behaviors. This ultimately harms most shareholders themselves—along with employees, customers, and communities. From Lynn Stout, Issues in Government Studies Issue 49, June 2012. Reprinted by permission of the Brookings Institute. Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
eBook - PDFManaging for Stakeholders
Survival, Reputation, and Success
- R. Edward Freeman, Jeffrey S. Harrison, Andrew C. Wicks(Authors)
- 2008(Publication Date)
- Yale University Press(Publisher)
Even if you believe that shareholder value could somehow repre-sent an intrinsic value, to actually realize this value, you must think about how value gets created for stakeholders. In short, you have to answer at least one of the basic purpose questions: How does our com-pany make each stakeholder better o√ ? A closely related variant of the stockholder strategy might be called 94 STAKEHOLDERS, PURPOSE, AND VALUES the financial stakeholder strategy. This version relies on satisfying the interests of the set of stakeholders who have financial stakes in the firm or who can heavily influence those stakeholders who have finan-cial stakes. Thus, management actions are aimed toward stockholders, banks (both commercial and investment), other holders of debt, invest-ment analysts, and so forth. The values of management in this case must dictate that financial stake counts for more than other kinds of interests. Management recognizes that ownership needs to be broadened to in-clude any group who is risking its capital in the firm. The danger in such an approach was clearly stated by a friend of ours who is a professor of finance when he said, ‘‘You have to remember that finance is a report of the underlying activity, not the activity itself.’’ In e√ect, it is easy to use the stockholder or finance variation of the specific stakeholder enterprise strategy to mistakenly identify the report of the activity with the underlying activity. Business is about creating value for stakeholders. Almost every business a√ects its customers, sup-pliers, employees, financiers, and communities. If a strategy can be fashioned that makes some of these interests more important than oth-ers, it must also be on the lookout for changes in those other stakeholder relationships as well as societal change, and it must not mistake measur-ing the results from the ‘‘important’’ stakeholders for the underlying activity of the creation of value for all.
