In 1986 Alfred Rappaport’s formal induction to industrial management about shareholder value gave an impetus to corporations around the world, to change management processes and create value to shareholders in the form of dividends and other social activities, including social responsibility. Apart from achieving consistent financial performance, some essential processes that may help in creating shareholder value can be outlined as: early adoption and implementation of a sound strategic plan, developing a strong team for delivering this strategic plan, identifying industry parameters that affect and do not affect the enterprise in terms of growth and competition, developing good control systems, and finally becoming a corporate citizen and assuming social responsibility as a vital goal for sustainable value creation.
“Management’s job is to find the right businesses, strategies and investments that consistently grow the company’s profitably over time. Conceptually, this is not difficult to grasp, but there are several factors that make achieving that goal decidedly unclear.”1
“The reality is that the shareholder value principle has not failed management;rather, it is management that has betrayed the principle.”2
The concept of shareholder value heads back to the 1950s and 1960s when economists and financial experts gave life to the concept with the help of the Capital Asset Pricing Model (CAPM). CAPM became the central point of the
shareholder value concept and advocated that its risk weighted factor allows one to assess the enterprise’s value today and also future profits and cash flows.Moreover, it defined opportunity cost of capital to the investor and also helped the enterprise decide how much to earn in order to utilize its capital resources.In 1986 Alfred Rappaport’s formal induction to industrial management about shareholder value gave an impetus to corporations round the world, to change management processes and create value to shareholders in the form of dividends and other social activities, including social responsibility.
In “Creating and Measuring Shareholder Value: Applicability and Relevance in Selected Swedish Companies” Beatrice Nyiramahoro and Natalia Shooshina have defined shareholder value as the “total economic value of an entity such as a company or a business unit is the sum of the value of its debt and its equity.This value of the business is named the corporate value while the value of the equity
portion is named shareholder value” (Rappaport 1998).
In the form of equation:Corporate value = Debt + Shareholder value3
It is also important to consider what markets really value while considering corporate value and corporate performance. Financial analysts and experts generally “Management’s job is to find the right businesses, strategies and investments that consistently grow the company’s profitably over time.
1 “CXO PERSPECTIVES – Lessons in Shareholder Value”, http://www.cio.com/article/31114/
2 “Ten Ways to Create Shareholder Value”, http://www.hbsp.harvard.edu/hbsp/hbr/articles/
3 “Creating and Measuring Shareholder Value: Applicability and Relevance in Selected Swedish Companies”