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10 ways to create shareholder value (Principle 1 (Don't provide…
10 ways to create shareholder value
Principle 9
Senior execs to bear same risks of ownership as stakeholders
Minimum stock ownership based on multiples of basic salary
Generally fails in exposing execs to risk
Principle 10
Provide investors with value-relevant information
Separate out
Cash flows
Accruals
Classify accruals by level of uncertainty
Medium
High
Provide a range & most likely estimate
Exclude arbitrary, value-irrelevant accruals
E.g. Depreciation, amortization
Details assumptions and risks for each line
Presenting key performance indicators that drive company's value
Principle 2
Do - Make strategic decisions
Maximise expected value
Value for range of scenarios
(Value added x probability of scenario)
Which strategy is likely to create greatest value?
How sensitive is the value of the most likely scenario?
Competitive dynamics and assumptions
Technology life cycles
Regulatory environment
How do alternative scenarios affect value?
Even at the expense of lowering near-term earnings
Corporate executives
Limited potential?
Restructuring or divestiture
Optimum mix of investments
Produce overall value
Sufficient value creation potential?
Warrant additional capital
Principle 4
Carry only assets that maximise value
Focus on high value activities
Research, design and marketing
Comparative advantage
Out-source low value added activities
Manufacturing
Principle 5
Return cash to shareholders when no value creating opportunities
Reduces the risk of management spending unwisely
Overpriced aquisitions
Principle 7
Reward operating-unit execs for adding multi-year value
Performance of unit might not = performance of company overall
Poorly operating units may benefit unfairly
Successful units might be penalised for poor performance overall
Principle 6
Reward CEO & senior execs for superior long-term returns
Not necessarily stock options
Effective pay incentives
At every level
Discounted Index option
Share value relative to a company's peers
Discounted Equity Risk Option (DERO)
Principle 1
Don't provide earnings guidance
Reporting rosy earnings catches up eventually
Don't manage earnings
Don't fiddle the accounts bottom line
Principle 8
Reward middle managers and frontline employees on key value drivers they can influence directly
3-5 leading indicators
Principle 3
Do - Make acquisitions
Maximise expected value
Even at the expense of lowering near-term earnings