Shareholder value
From Wikipedia, the free encyclopedia
Shareholder value is a term used in many ways:
- To refer to the market capitalization of a company (rarely used)
- To refer to the concept that the primary goal for a company is to enrich its shareholders (owners) by paying dividends and/or causing the stock price to increase
- To refer to the more specific concept that planned actions by management and the returns to shareholders should outperform certain bench-marks such as the cost of capital concept. In essence, the idea that shareholders money should be used to earn a higher return then they could earn themselves by investing in risk free bonds for example. The term in this sense was introduced by Alfred Rappaport in his 1986 book Creating Shareholder Value (ISBN 0-684-84410-9)
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[edit] Definition
For a publicly traded company, SV is the part of its capitalization that is equity as opposed to long-term debt. In the case of only one type of stock, this would roughly be the number of outstanding shares times current shareprice. Things like dividends augment shareholder value while issuing of shares (stock options) lower it. This Shareholder value added should be compared to average/required increase in value, aka cost of capital.
For a privately held company, the value of the firm after debt must be estimated using one of several valuation methods, s.a. discounted cash flow or others.
[edit] Shareholder Value Maximization
This management principle, also known under value based management, states that management should first and foremost consider the interests of shareholders in its business decisions. Although this is built into the legal premise of a publicly traded company, this concept is usually highlighted in opposition to alleged examples of CEO's and other management actions which enrich themselves at the expense of shareholders. Examples of this include acquisitions which are dilutive to shareholders, that is, they may cause the combined company to have twice the profits for example but these might have to be split amongst three times the shareholders.
[edit] Criticism
The sole concentration on SV has been widely criticized. While SV might be best for the owners of a corporation, for society other aspects like employment, environmental/ethical issues or business practices (monopoly) play a higher role. A management decision can maximize SV while lowering global welfare. It can also threaten the long-term health of a company, for example by emphasizing dividends and returning cash to shareholders rather than investment.
[edit] Alternative Definition based upon Criticism: Stakeholder Analysis
The intrinsic or extrinsic worth of a business measured by a combination of financial success, usefulness to society, and satisfaction of employees, the priorities determined by the makeup of the individuals and corporations that together own the shares and direct the company. This is sometimes referred to as stakeholder analysis.
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