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Ten Ways to Create Shareholder Value - Coggle Diagram
Ten Ways to Create Shareholder Value
PRINCIPLE 1
Do not manage earnings or provide earnings guidance
companies should not focus on meeting earnings benchmarks
they need to focus more on value-creating
they should spend on R&D, advertising, maintenance, hiring, etc.
PRINCIPLE 2
Make strategic decisions that maximise expected value, even at the expense of lowering near-term earnings
most companies evaluate and compare strategic decisions in terms of the estimated impact on reported earnings when they should be measuring against the excepted incremental value of future cash flows instead
PRINCIPLE 3
Make acquisitions that maximise expected value, even at the expense of lowering near-term earnings
companies typically create most of their value through day-to-day operations, but a major acquisition can create or destroy value faster than any other corporate activity
value-orientated managements and boards also carefully evaluate the risk that anticipated synergies may not materialise
PRINCIPLE 4
Carry only assets that maximise value
value-orientated companies regularly monitor whether there are buyers willing to pay a meaningful premium over the estimated cash flow value to the company for its business units, brands, real estate and ither detachable assets
companies can reduce the capital they employ and increase value in two ways:
by focusing on high value-added activities (like research and marketing) where they enjoy a comparative advantage
by out-sourcing low value-added activities (like manufacturing) when these activities can be reliably performed by others at lower cost
PRINCIPLE 5
Return cash to shareholders when there are no credible value-creating opportunities to invest in the business
value-conscious companies with large amounts of excess cash and only limited value-creating investment opportunities return the money to shareholders through dividends and share buybacks
this gives shareholders a chance to earn better returns elsewhere
it also reduces the risk that management will use the excess cash to make value-destroying investments - in particular, ill-advised, overprices acquisitions
PRINCIPLE 6
Reward CEOs and other senior executives for delivering superior long-term returns
Companies need effective pay incentives at every level to maximise the potential for superior returns
companies need to balance the benefits of requiring senior executives to hold continuing ownership stakes and the resulting restrictions on their liquidity and diversification
PRINCIPLE 7
Reward operating-unit executives for adding superior multiyear value
to create incentives for an operating unit, companies need to develop metrics such as shareholder value added (SVA)
PRINCIPLE 8
Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly
although sales growth, operating margins, and capital expenditures are useful financial indicators for tracking operating-unit SVA, they are too broad to provide much day-to-day guidance for middle managers and frontline employees, who need to know what specific actions they should take to increase SVA
PRINCIPLE 9
Require senior executives to bear the risks of ownership just as shareholders do
minimum ownership is usually expressed as a multiple of base salary, which is then converted to a specific number of shares
For other executives, the corresponding number is three times salary
top managers are further required to retain a percentage of shares resulting from the exercise of stock options until they amass the stipulated number of shares
PRINCIPLE 10
Provide investors with calue-relevant information
better disclosure not only offers an antidote to short-term earnings obsesion but also serves to lessen investor uncertainty and so potentially reduce the cost of capital and increase the share price