Shareholder Value is Still a good business

Italo Lima

The first model of enterprise is that one which the purpose is create value for the

shareholders and owners. In the theory the firm should have its market value maximized

all the time, because in this way the resources are better employed in the economy and

consequently the investors will have a higher share price and resulting low cost of capital,

making it cheaper to raise money for expansion and growth.

When a investor buys a share in a firm, he is becoming a partner, even in a small

proportion. Accountable to shareholders and deliver results that create value for your

investment are important for a public company. This market position has many advantages

such as the possibility of financing projects. However, brings responsibilities and

obligations, especially in terms of governance and transparency. In other words, the ideia

of becoming a partner is give confidence to the company, this way when the company are

developing, the shares are developing too, consequently the investors are getting some

return.

This way of enterprise is commonly indicted of being the problem of many

companies and shares. But the shareholder value is not the problem, the problem is the

difference between the purposes of the shareholders and the purposes of the

management. Today, the idea is buy some shares of a company to get profit very fast, but

the real perspective of growth of a company is made with a long-term. All in all, the

management gets a short-term to make the company increase a lot, which ends up

generating problems and conflicts do not always end up with the actual income of the

shareholder.

A lot of companies works in a way where there is no interests of long-term

shareholders, what is completely fail. What matters is not investor holding periods but

rather the markets valuation horizon, in other words, the number of years of expected

cash flows required to justify the stock price. If a investor wants a short-term to get some

profit, he wont get a real profit, because the stock prices reflect the markets the long view.

The good idea is know that is necessary some time around 10 years to the cash flows

justify the stock price. In this way, the management might deliver these flows, and no one

can blame the short-term to conquer profits in a excuse to fail, because the market should

mold the companies strategies not the shareholders list.

To create a real shareholders value is necessary that the company take decisions

that only maximize the value, whether it be a long-term decision. Also, a reward for

everyone that is involved at any way to the growth is important, because this way you are

giving a incentive to de growth increase much more. A study made by Alfred Rappaport

show us 10 steps to create a good shareholders value. The steps are:

Step 1) Do not manage earnings or provide earnings guidance.

Step 2) Make strategic decisions that maximize expected value, even at the expense of

lowering near-term earnings.

Step 3) Make acquisitions that maximize expected value, even at the expense of lowering

near-term earnings.

Step 4) Carry only assets that maximize value.

Step 5) Return cash to shareholders when there are no credible value-creating

opportunities to invest in the business.

Step 6) Reward CEOs and other senior executives for delivering superior long-term

returns.

Step 7) Reward operating-unit executives for adding superior multiyear value.

Step 8) Reward middle managers and frontline employees for delivering superior

performance on the key value drivers that they influence directly.

Step 9) Require senior executives to bear the risks of ownership just as shareholders do.

Step 10) Provide investors with value-relevant information.

A good example that is possible se that the company cares about the shareholders

value is Apple. The company has a plan to release its products once per year, so the

growth of the company's value is a long-term thing. On the other hand, the efforts to give

valeu to the shares are enormous. The strategy used is share repurchases. The company

buy back the shares that were sold for a good value, increase their own shares, including

the repurchased, on the market. In early 2014, Apple has bought back a whopping $40

billion worth of its shares. Principally in the first-quart of iphone selling, the company

bought $14 billion of shares back, because the iphone didnt sell as was expected. This

action gave a good growth in the shares of the apple, how its possible see in the following

chart.

References

Stenzel, Joe. (2007) Lean Accounting: Best Practices for Sustainable Integration. John

Myles & Sons.

Rappaport, Alfred. (2006) Ten Ways to Create Shareholder Value. Retrieved from https://

hbr.org

Sparks, Daniel. (2014) Apple's Subtle Method to Build Shareholder Value Is Working.

Retrieved from https://fool.com

Stark, Karl. How to Build Long-term Shareholder Value. Retrieved from http://inc.com.

https://hbr.orghttps://fool.comhttp://inc.com