International Value Management (revised by trail blog)

Shareholder wealth maximisation is used to choose as firm objective by corporation in value management. Although, many firms do not use shareholder value as the most important goal, the increasing threat of takeover by teams of managers searching for poorly managed businesses changes abovementioned situation. In 2011, Netflix share prices reduce from $304 to $70 as its DVD price increasing strategy. In addition, Blackberry loss it 77% shares because its PlayBook tablet strategy. According to examples on Netflix and blackberry, it could be found that shareholder wealth are influenced by corporate strategy significantly.

 

Comparing shareholder value-based management, earnings-based management leads some drawbacks which are:

Accounting is subject to distortions and manipulations;

The investment made is often inadequately represented;

The time value of money is excluded from the calculation;

Risk is not considered

In addition, there is one more issue could be existed in earnings per share which is the price to earnings ratio seems to not fairly price an asset. For example, the EPS and P/E would be different under identical assets but different equity as the difference in net income and tax.

 

	Firm A	Firm B
2004	1.5	1.8
2005	1.6	1.0
2006	1.7	2.3
2007	1.8	1.5
2008	2.	2.0

 

 

Therefore, shareholder wealth maximisation should be considered as a corporate goal. Analysing above table, firm a shareholder value could be considered more than firm B as it low standard deviation in firm A shows low risks. There are 5 actions could create value such as increasing the return on existing capital, raising investment in positive spread units, divesting assets, extending the planning horizon and lowering the required rate of return.

Then, based on that result, Rappaport (2006) has defined 10 ways to create shareholder value.

1.    Do not manage earnings or provide earnings guidance

2.    Make Strategic Decisions that maximize expected value, even at the expense of lowering near-term earnings

3.    Make acquisitions that maximize expected value, even at the expense of lowering near-term earnings.

4.    Carry only assets that maximize value

5.    Return cash to shareholders when there are no credible value-creating opportunities to invest in the business.

6.    Reward CEOs and other senior executive for delivering superior long-term returns.

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

8.    Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly.

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

10. Provide investors with value-relevant information.

However, although those ten ways could help create long-term shareholder value for most corporations, some corporations should carefully approach those methods, in particular high-tech corporations. The reason of that is IT corporations development have highly sensitive relationship with shareholders price. As a high risk and high return of high-tech corporations, the return expectation of those corporation investors would much higher than other types of corporation shareholders. When share price goes down, less attraction would get by investors rapidly and those high-tech corporations may loss fund support for investors. Moreover, as high-tech corporations used to have long-term research and development cycle time, the less fund support would easier to let those corporations into capital shortage. Then, the corporations would turn to a vicious circle. Therefore, for those high-tech corporations, the manager should may much attention on short-term profit strategy to attract its shareholders.

All in all, shareholder wealth maximization is generally reflecting a corporation value at most time. 10 ten above-mentioned ways would help to most corporations, except high-tech corporations. For those high-tech corporations, long-term strategy is important and profit value should still be considered.

Bibliography:
Rappaport, A. (2006). Ten ways to create shareholder value. Harvard Business Review, 84(9), 66--77.