Shareholders Value

Shareholders’ value can be defined as the value that shareholders of a company receive as dividends and stock price appreciation as a result of better decision-making by the management that ultimately results in a company’s growth in sales and profit. The higher the profits earned, the higher shall be the dividends offered to the equity holders.

It is the value that is delivered by an entity to its existing equity holders. Maximizing the shareholders’ value is one of the key objectives of any organization. It highly depends on the ability of its management to make appropriate decisions and the way these decisions are implemented for driving in more sales and leveraging the profits earned by the same.

Shareholders’ value is the practice of a public company where the management works towards increasing their revenues, cash flows, and sales which allows them to distribute more value or benefits to their shareholders in the form of dividends.

It took significance in the market in late 1980’s and early 1990’s based on the business management principles known as value-based management. The shareholders value theory believes that the value could be added to equity owners or shareholders through the market value of the shares and dividends.

 Shareholder’s value is a primary objective for most companies in the 21st century. With its help, the companies are able to focus with a broader perspective that is they are evaluating decisions based on not just current but future environments too.

The decision-making skills of the management incorporate all the necessary measures that can be taken for the purpose of maximizing shareholder’s value so that they remain content and stay glued to the organization. The way the present equity holders are treated decides not only their exit but also their entry.

A company must always prioritize the interests of its shareholders and must take every possible measure for shareholders’ value creation. There are various principles that a company must necessarily follow for shareholder’s value creation. The first principle that a company must abide by is that it must not manage its earnings or, in other words, it must not participate in the earnings expectations game.

This is high because if a company focuses too much on maximizing its earnings, it tends to compromise its value, and this can even destroy its ability to make operating decisions. The company must take strategic decisions that can help the same in maximizing the expected value, even if it comes at the cost of slight losses or a lowered rate of earnings in the near future. The company must make acquisitions that can help it by maximizing the expected value. The company must move forward with assets that add value to the business.

The measure of an organization’s success can be learned to the extent it goes for shareholders value creation and maximizing it. The management of an organization should primarily focus on the interests of its shareholders while making significant management decisions. There are seven drivers through which a company can maximize its shareholder value. These drivers are revenue, cash tax rate, operating margin, cost of capital, investment in WC (working capital), incremental CE (capital expenditure), and competitive advantage period. The organization must not just provide a focus on profit maximization. Short-term profit maximization is short-lived.

Following are the 4 ways -

• The organization can choose to increase the unit price of its product by assuming that it is selling goods at the same amount.
• The management of the organization must make appropriate decisions so that it is able to sell more units of goods. This will ultimately boost the revenues earned by the organization, and as a result of this, it can declare a higher amount of dividends for its shareholders.
• The management must take necessary decisions for decreasing or eliminating the unnecessary costs in order to boost the savings.
• The management must make the necessary decisions for increasing its fixed cost utilization.

Let us understand the advantages of management taking decisions based on the shareholders value theory through the discussion below.

• Shareholder’s value can bring a lot of benefits to an organization. It offers the management of a company with a long-term view and based on this. The management can design strategic decisions.
• It allows the company to emphasize more on the future and its clients and consumers and offers a universal approach as well.

Below are a few disadvantages of shareholders value creation for both the company and their shareholders.

• Shareholder’s value can even have implications on the well-being of an organization. A lot of organizations tend to stress only maximizing their profits for the sake of maximizing shareholder’s value. This is why the organizations take up rigorous and devastating measures that compromise business ethics but fetch profits.
• The organization might choose to compromise on quality, increasing the prices of the products unnecessarily, etc. However, these profits earned are just short-lived. Such organizations might end up losing customer’s trust and may earn bad goodwill in the eyes of society and its industry too. This increases the risk for the organization and may even result in bankruptcy for the same.

In the modern era, it is extremely vital to keep the value added to the investors of the company at the very forefront of the company’s decision-making styles. Shareholders value creation somehow dictates the market sentiment about the company, and thereby, the market value of the company in the open market.

The importance of creating shareholders’ value is strongly linked with the efficiency of capital markets. It also encourages a legitimate process of evaluation of the performance of the management. The shareholder’s value is also important for organizations in developing an environment of trust that will keep the shareholders glued with the organization and will also help in leveraging capital investments in the company.

This has been a guide to what is Shareholders Value. Here we explain how to create value and maximize it for shareholders, its advantages & disadvantages. You can learn more about accounting from the following articles –

• Formula for Notional Value
• Shareholder Structure
• Shareholders Equity Statement Example
• Shareholder Equity vs Net Worth