Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP

What is Shareholder Value?

Shareholder value is the Shareholders' financial worth in a company. Shareholder value may go up due to the overall success of the company leading to an increase in their capital gains and dividends. A company may have an increase in earnings, sales, and cash flows over a long period. The board of directors of a company is responsible for deciding the strategies that the corporation will use to generate higher capital returns. If the returns on investments and capitals are high, then the company can pay its shareholders more dividends. Some changes in cash flows may also decrease, leading to a decrease in shareholder value.

How does Shareholder Value Work?

Shareholder value happens where the management team of a company is able to apply smart business decisions. Smart decisions help the company to increase shareholder value by increasing the share price, earnings, and dividends. Generally, the managements prime role is to increase shareholder value. So, any company's management must strive to ensure that the shareholder's interests are put into consideration when making decisions. Higher shareholder value is, therefore, beneficial to both the company as well as the management.

Calculating Shareholders Value

The major goal of investors is to generate higher returns from what they have invested. For this reason, investors should be able to calculate their shareholder value. Below are four steps of calculating shareholder value:

• Step 1: Step one involves subtraction of preferred dividends of the company from its net income. Preferred dividends refer to dividends that a company pays its preferred stockholders. Net income, on the other hand, is the total earnings of the company after subtracting depreciation, operating and non-operating expenses, taxes, and interest.
• Step 2: Step two involves the computation of the earnings of the company by share. To compute this, you will be required to divide the available income of the company by its overall outstanding shares.
• Step 3: In step three, you are required to add the price of the stock to per-share earnings. For instance, lets assume that a company is selling its stock at $40 for every share. In this case, you will have to add $40 as well as the earnings, which in this case are $2 per share to get $42.
• Step 4: In this stage, you are required to multiply the total arrived at in stage three by the total number of shares an individual shareholder holds. For instance, lets assume that a shareholder holds 10 shares. In this case, this particular shareholder will have a shareholder value of $142 ($42 x 10 = $142).

How to Create Shareholder Value

To increase profitability and maximize shareholder value, the company can implement three strategies. The strategies include:  

Revenue growth The company can increase its revenue from goods and services by increasing the volume of sales or through price inflation. Any existing company would want the consumers to stick to using their brand products and not deviate to the competing brands. The company should ensure that the brand recognition in the market and the value they give consumers is unmatched. The company can make use of different promotional strategies to attract new customers to its products. They can also improve the products they have or come up with new products. By doing this, the company may get loyal customers while still increasing their revenues. A company can also increase the prices of its products to generate more revenue. Price increments can go together with the production of new products. The company creates new quality products which are then priced different from the old ones. The company can use the volume of sales and price inflations at the same time.  

Operating Margin The company can also increase profitability by reducing its operating costs and total expenses. Building a good company-supplier relationship is beneficial to the company. The company may receive discounts from suppliers whenever they make large orders. Negotiations may also help the company reduce the cost of buying production materials. The use of automation methods to manufacture products delivers quality products and reduces return rates of defective products. The management team needs to use effective strategies to ensure the processes cost less but do not affect quality. The largest expenses in a company are from sales, administration, and general payments of labor. When it reduces this, then they can achieve an operating margin. The company can reduce its marketing budget and cut down any unnecessary labor costs.  

Capital efficiency Capital efficiency shows how the company is using its capital in daily operations and the profits they generate. The use of capital to generate profits should be higher than the company's expenses. Profits = total assets liabilities

Limitation of maximizing shareholder value

Shareholder value brings about conflicts in companies. As much as the equity funds of shareholders increase their value, it does not equate to value for customers and employees in the company. The shareholders seem to be creating wealth, but the employees remain stagnant. The Chief Executive officers of most companies also agree that shareholder value maximization cannot be the main goal of a company. They say it can slow down the company's productivity, bring about inequalities in growth, lead to financial crashes, and cause distrust in the business.

Conclusion

People understand stakeholder value differently. Some believe that the company directors have a legal obligation to increase company profits to improve shareholder value. However, this does not hold as this is general wisdom. The law does not tie any company to increase shareholder value. The strategies the company uses will determine if it will generate interests or not.

Related Topics

• Corporate Governance Law (Intro)
• What is Business Governance?
• Berle-Means Thesis 
• Corporate Governance Rating Definition
• Who are the members of a corporation?
• Corporate Charter
• Shareholder Register
• Common Stock
• Preferred Stock
• Par Value
• Authorized Shares
• Issued Shares of Stock
• Unissued Shares of Stock
• Outstanding Shares
• Institutional Shares
• Dual Class Shares
• What is a closely-held corporation?
• Close Corporation Plan Definition
• What is a Private Company vs a Public Company?
• What is the role and purpose of the corporation?
• What is the Agency theory of corporate governance?
• Shareholder-Centric Perspective
• Shareholder Value
• What is the Stakeholder theory of corporate governance?
  
• What is the role & rights of Shareholders in the corporation?
  
• Shareholder Democracy Definition
• Quorum Definition
• Information Circular
• Straight and Cumulative Voting
• Statutory (Straight)
  
• Cumulative Voting
• Plurality Voting
• Class Voting Shareholders
• Changing the Voting Rules
• Supermajority (Voting)
• Shareholder Sponsored Proposal 
• What are the variations on attributes of Ownership structure?
• Stock Split
• What are the fiduciary duties owed by shareholders?
• When is a shareholder personally liable for corporate obligations?
• Appraisal Rights
• Dissenter's Rights
• Say on Pay Rights
• How can shareholder enforce their rights (direct and derivative actions)?
• Amotion
• What is the process for bringing a Derivative action?
• What are corporate vote Proxies?
• Proxy Statement
• Proxy Fight or Contest Definition & Explanation 
• What is Shareholder Activism and the significance of Institutional Investors?
• Activist Investor
• Overview of Board of Directors
• Board Decision Making
• Advisory Board (Observer Directors)
• What is the role of the Board of Directors?
• Board of Trustees
• Board of Governors
• What is the composition of the board of directors?
• Chairman of the Board
• CEO as Chairman of the Board
• Inside Director
  
• Outside Director
• Outside Director or Non-Executive Director Definition
• Independent Outside Director
• Budget Committee
• Audit Committee
• Compensation Committee
• Nomination Committee (Corporate Board)
• What standards govern the actions of the board of directors?
• Duty of Candor Definition
• Duty of Care (Board of Directors)
• Duty of Loyalty (Directors) 
• Self-Dealing
• Board Evaluation Definition
• What is the Business Judgment Rule?
• What is D&O insurance?
• Codetermination (Foreign)
• What is the role of Managers of the corporation?
• What standards govern manager actions?
• Chief Executive Officer (CEO)
• Chief Financial Officer
• Chief Information Officer (CIO)
• Chief Investment Officer (CIO)
• Chief Legal Officer
• Chief Operating Officer
• Chief Risk Officer
• Chief Security Officer
• Chief Technology Officer (CTO)
• What are the primary state and federal corporate governance laws?
• What is the role of the state in corporate governance?
• What is the role of Securities Laws in corporate governance?
• What is the role of the Foreign Corrupt Practices Act in corporate governance?
• What is the Sarbanes-Oxley Act (SOX) effect on corporate governance?
• Sarbanes-Oxley Act (SOX)
• What is the Dodd-Frank Wall Street Reform and Consumer Protection Act effect on corporate governance?
• Corporate Monitors
• What industry organization standards affect corporate governance?
• How do proxy advisory firms affect corporate governance?
• What is the role of ethics in corporate governance?
• What are the major causes of corporate governance issues?
• What are the access to information issues?
• What are decision-making structure issues?
• What are the power struggle or competition issues?
• Holding Company
• What are hostile takeovers and defenses to hostile takeovers?
• Williams Act
• Staggered Board
• Shark Repellent Defenses?
• Poison Pill Defenses?
• Flip Over Poison Pill Definition
• Flip In Poison Pill Definition
  
• Voting Poison Pill Plan
• Delay-Tactic Defenses?
• Legal Lockup Defenses?
• White Knight and Pac Man Defenses?
• Jonestown Defense
• Lady Macbeth Strategy
• Macaroni Defense
• Yellow Knight
• Back-end Plan Definition
• Backflip Takeover Definition
• Dead Hand Provision Definition
• Kamikaze Defense
• Operating Company Property Company Model
• Whitemail
• Scorched Earth Policy Definition
• Revlon Rule
• What are benefit-alignment issues?
• Cadbury Rules Definition