Ten Ways to Create Shareholder Value The Idea in Brief Many firms sacrifice sustained growth for short- term financial gain. For example, a whopping 8. R& D spending just to meet quarterly earnings benchmarks. They miss opportunities to create enduring value for their companies and their shareholders.

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How to cultivate the future growth your firm needs to succeed? Rappaport identifies 1.

Papers P2 and E3 Performance. Ten Ways to Create Shareholder Value. Reward middle managers and frontline employees for delivering superior performance on key value drivers. Method Of Calculating Shareholder Value Analysis Finance Essay. Published: 23, March 2015. This study illustrates the theory, model and method of calculating. The seven value drivers are. Business & Finance Business and Industry Industries and Professions Companies What are the seven value drivers of Alfred Rappaport?

First among them: Don. Another practice: Ensure that executives bear the same risks of ownership that shareholders do. At e. Bay, for example, executives have to own company shares equivalent to three times their annual base salary. When executives have significant skin in the game, they tend to make decisions with long- term value in mind. The Idea in Practice Rappaport recommends these additional practices to create long- term growth for your company: Make strategic decisions that maximize expected future value. In comparing strategic options, ask: Which operating units?

Which have limited potential and therefore should be restructured or divested? What mix of investments across operating units should produce the most long- term value? Carry assets only if they maximize the long- term value of your firm.

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Focus on activities that contribute most to long- term value, such as research and strategic hiring. Outsource lower value activities such as manufacturing. Consider Dell Computer.

Dell invests extensively in marketing and telephone sales while minimizing its investments in distribution, manufacturing, and inventory- carrying facilities. Return excess cash to shareholders when there are no value- creating opportunities in which to invest. Disburse excess cash reserves to shareholders through dividends and share buybacks. Standard stock options diminish long- term motivation, since many executives cash out early. These options reward executives only if shares outperform a stock index of the company.

Instead of linking bonuses to budgets (a practice that induces managers to lowball performance possibilities), develop metrics that capture the shareholder value created by the operating unit. And extend the performance evaluation period to at least a rolling three- year cycle. Reward middle managers and frontline employees for delivering superior performance on key value drivers they influence directly. Focus on three to five leading value- based metrics, such as time to market for new product launches, employee turnover, customer retention, and timely opening of new stores.

Provide investors with value- relevant information. Counter short- term earnings obsession and investor uncertainty by improving the form and content of financial reports. Prepare a corporate performance statement that allows analysts and shareholders to readily understand the key performance indicators that drive your company. When executives destroy the value they are supposed to be creating, they almost always claim that stock market pressure made them do it. The reality is that the shareholder value principle has not failed management; rather, it is management that has betrayed the principle. In the 1. 99. 0s, for example, many companies introduced stock options as a major component of executive compensation. The idea was to align the interests of management with those of shareholders.

But the generous distribution of options largely failed to motivate value- friendly behavior because their design almost guaranteed that they would produce the opposite result. To start with, relatively short vesting periods, combined with a belief that short- term earnings fuel stock prices, encouraged executives to manage earnings, exercise their options early, and cash out opportunistically. The common practice of accelerating the vesting date for a CEO.

The climate changed dramatically in the new millennium, however, as accounting scandals and a steep stock market decline triggered a rash of corporate collapses. The ensuing erosion of public trust prompted a swift regulatory response.