Shareholder Value Maximization Goal
A Shareholder Value Maximization Goal is a business goal that requires the maximization of shareholder value.
- AKA: Good for the Shareholder, Value-based Management.
- Context:
- It can be correlated to the optimization of:
- Example(s):
- Layoff people in high-wage 'home' country and hire people on low-wage country.
- …
- Counter-Example(s):
- See: Business Plan.
References
2014
- (Wikipedia, 2014) ⇒ http://en.wikipedia.org/wiki/shareholder_value#Maximizing_shareholder_value Retrieved:2014-10-20.
- This management principle, also known under value based management, states that management should first and foremost consider the interests of shareholders in its business actions. (Although the legal premise of a publicly traded company is that the executives are obligated to maximize the company's profit, [1] this does not imply that executives are legally obligated to maximize shareholder value.) The concept of maximizing shareholder value is usually highlighted in opposition to alleged examples of CEO's and other management actions which enrich themselves at the expense of shareholders. Examples of this include acquisitions which are dilutive to shareholders, that is, they may cause the combined company to have twice the profits for example but these might have to be split amongst three times the shareholders. As shareholder value is difficult to influence directly by any manager, it is usually broken down in components, so called value drivers. A widely used model comprises 7 drivers of shareholder value, [2] giving some guidance to managers:
- Revenue
- Operating Margin
- Cash Tax Rate
- Incremental Capital Expenditure
- Investment in Working Capital
- Cost of Capital
- Competitive Advantage Period
- Looking at some of these elements also makes it clear that short term profit maximization does not necessarily increase shareholder value. Most notably, the competitive advantage period takes care of this: if a business sells sub-standard products to reduce cost and make a quick profit, it damages its reputation and therefore destroys competitive advantage in the future. The same holds true for businesses that neglect research or investment in motivated and well-trained employees. Shareholders, analysts and the media will usually find out about these issues and therefore reduce the price they are prepared to pay for shares of this business. This more detailed concept therefore gets rid of some of the issues (though not all of them) typically associated with criticism of the shareholder value model.
Based on these seven components, all functions of a business plan and show how they influence shareholder value. A prominent tool for any department or function to prove its value are so called shareholder value maps that link their activities to one or several of these seven components. So, one can find "HR shareholder value maps", "R&D shareholder value maps", and so on.
- This management principle, also known under value based management, states that management should first and foremost consider the interests of shareholders in its business actions. (Although the legal premise of a publicly traded company is that the executives are obligated to maximize the company's profit, [1] this does not imply that executives are legally obligated to maximize shareholder value.) The concept of maximizing shareholder value is usually highlighted in opposition to alleged examples of CEO's and other management actions which enrich themselves at the expense of shareholders. Examples of this include acquisitions which are dilutive to shareholders, that is, they may cause the combined company to have twice the profits for example but these might have to be split amongst three times the shareholders. As shareholder value is difficult to influence directly by any manager, it is usually broken down in components, so called value drivers. A widely used model comprises 7 drivers of shareholder value, [2] giving some guidance to managers:
- ↑ Maxwell S. Kennerly, Esq., "eBay v. Newmark: Al Franken Was Right, Corporations Are Legally Required To Maximize Profits" (September 13, 2010)
- ↑ Corporate Financial Strategy, Ruth Bender, Keith Ward, 3rd edition, 2008, p. 17
2013
- https://www.washingtonpost.com/business/economy/maximizing-shareholder-value-the-goal-that-changed-corporate-america/2013/08/26/26e9ca8e-ed74-11e2-9008-61e94a7ea20d_story.html
- QUOTE: ... It used to be a given that the interests of corporations and communities such as Endicott were closely aligned. But no more. Across the United States, as companies continue posting record profits, workers face high unemployment and stagnant wages.
... “We don’t build companies to serve Wall Street,” said Margaret Blair, a professor at Vanderbilt Law School. “We build corporations to provide goods and services to a society and jobs for people.”
... In 1970, Nobel Prize-winning economist Milton Friedman wrote an article in the New York Times Magazine in which he famously argued that the only “social responsibility of business is to increase its profits.” Then in 1976, economists Michael Jensen and William Meckling published a paper saying that shareholders were “principals” who hired executives and board members as “agents.” In other words, when you are an executive or corporate director, you work for the shareholders.
- QUOTE: ... It used to be a given that the interests of corporations and communities such as Endicott were closely aligned. But no more. Across the United States, as companies continue posting record profits, workers face high unemployment and stagnant wages.
1970
- (Friedman, 1970) ⇒ Milton Friedman(1970). “The Social Responsibility of Business is to Increase its Profits." In" The New Yorks Times Magazine
- QUOTE: ... In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose – for example, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services. ...