Objective of the ResearchThe study also aims to give a general picture of how shareholder value is created as abackground to measuring shareholder value.Direct factors includes1. Capital budgeting (dividend policy, capital structure, weighted average cost of capital, required rate ofreturn);2. Corporate governance (agency theory);3. Market environment (industry regulations);4. Business ethics and corporate social responsibility (accountability, earnings quality, stakeholder theory);5. Shareholder’s return measurement (TSR, EVA, Cash return on investment);6. Innovations as return driver (R&D investments, intangibles)Many indirect factors can affect shareholder value such as the environment surrounding the firm,weaker business climate, political situation, and currency fluctuations. Which are seldom studiedin previous work.Research problems:1)what happens to product/service outcomes and/or profit and/or the environment whenshareholder value becomes the primary corporate goal?How much cash should firms give back to their shareholders ? should corporations pay theirsharholders through dividends or by repurchasing their shares, which is the least costly form ofpayout from tax perspective?Which of the financial characteristics of a firm its management should concentrate on, whenmaximizing the wealth of the shareholders??Who benefits from corporate commitment to shareholders?Impact of the dividend policy on shareholders value?The effect of acquisitions and offshoring on the sharholder value?How should sharholder value be measured?
Research methodology:Secondary research—authoritative sources---sebi,bse,nse,cmie and ministry of statistics, projectmanagement offices,Indian industrial groth---specific companiesMost people today would say corporations have but one proper purpose: maximizing theirshareholders’ wealth as measured by stock price. Other goals--serving customers, building greatproducts, providing good jobs—are viewed as legitimate business ends only to the extent they increase“shareholder value.”Indeed, there is good reason to suspect that focusing on “shareholder value” may in fact be a mistakefor most business firms. This is because there is no single shareholder value—different shareholdershave different needs and interests depending on their investing time frame, degrees of diversificationand interests in other assets, and perspectives on corporate ethics and social responsibility. Shareholdervalue ideology focuses on the interests of only a narrow subgroup of shareholders, those who are mostshort-sighted, opportunistic, willing to impose external costs, and indifferent to ethics and others’welfare. As a result shareholder value thinking can lead managers to focus myopically on short-termearnings reports at the expense of long-term performance; discourage investment and innovation; harmemployees, customers, and communities; and lure companies into reckless and socially irresponsiblebehaviors. This ultimately harms most shareholders themselves—along with employees, customers, andcommunities.To measure shareholder value creation has been the issue of discussion allaround the world. It has become crucial since the companies were increasinglycommitting to creating shareholder value. Old traditional measures arecriticised for having low correlation with shareholder value creation. Therefore,new valuation methods are needed to measure the shareholder value creation.However, the changing process from the traditional methods to the new ones isnot easily welcomed. How then shareholder value creation is measurednowadays is of crucial importance. In order to address this issue, the thesispresents in a general way how shareholder value is created as a background tothe valuation methods being used for shareholder value creation measurement.1.1 BackgroundOne of the most frequently used terms in business today is Shareholder value.The "equity culture" wildfire is spreading rapidly from the US to the rest of the
world (Thakor et al, 2000). It is seen as crucial all over the world. In Swedenthe new measurement systems of shareholder value creation were introduced inthe last decade and have been slowly introduced in various companies. Indeed,some of the leading companies like SCA and SKF have made the creation ofshareholder value one of their key corporate objectives.In the other parts of Europe this idea had spread earlier and rapidly. InGermany, for example, Veba’s – one of the industrial giants – CEO closeddivisions that date back to Veba’s beginning, fired long-time managers, andlaid off thousand of workers – all in the name of investors. That CEO worriedabout shareholder value. ―Satisfying the shareholders is the best way to makesure that other stakeholders are served as well. It does no good when all thejobs are in the sick companies‖—said that CEO (Eitemann at al, 2000).What is shareholder value and why should the financial managers care about it?If shareholders believe that the corporation is underperforming, they can try toreplace the board in the next election. If they succeed, the new board willappoint a new management team. But the vote on a new board is quiteexpensive and rarely successful so the shareholder will simply sell their shares(Brealey and Myers, 2000).Moreover shareholders are the owners of the corporation and the board ofdirectors are their representative and elected by them. The objective function ofthe corporation is to maximize the shareholder value. Managers in most of thedeveloped world must focus on building shareholder value (Copeland et al,2000).Creating and measuring shareholder value by Beatrice Nyiramahoro and Natalia Shooshina2If the managers and director don’t maximize value, there is always the threat ofa hostile takeover. The further a company’s stock price falls, due to the wrongheadedpolicy, the easier it is for another company or group of investors to buyup a majority of the shares.Large institutional investors are increasingly influencing corporate policies.They are creating a heightened awareness of the role of compensation-basedincentives in focusing executive efforts on creating shareholder value.Companies are rewarding senior executives with shares and with options onthese shares. Thus, share price is now critical for most senior executives(Thakor et al, 2000).Most executives today understand that the need to create shareholder value isparamount and the world’s most competitive management teams areresponding to the pressure to create value by embracing new metrics and newmodels for managing their companies (Copeland et al, 2000)Traditionally a variety of measures were used to show how much value wascreated. Some of them are earning per share (EPS), Return on Investment(ROI) and Return on Equity, EVA (economic value added). Moreover a varietyof consulting firms have been creating their own measures and recommending
them to their clients.In today’s Globalized world characterized by accelerated competitioncompanies must stimulate profitable growth, measure value creation andcontinually learn from success and setbacks. The only companies that canacquire new capital, grow and remain profitable are those that create value.Active shareholders are putting more pressure on corporate management tomeasure and communicate how they are creating value and shareholders findanything other than value-creating companies unacceptable (Anelda, 2000).Scott (1998) expressed that there is no doubt that nowadays the principal goalof management is the enhancement of shareholder value and this meansChapter 1 − Introduction3maximizing the returns generated to those people who have an ownership stakein the business.This idea of creating shareholder value comes as an imperative to manycompanies and leads them to get actively involved in that process. Companiescreate shareholder value through a set of strategies, depending on what theybelieve would create more value.2.1 Research approachIn the process of answering our research issue we used different approaches.We used an explorative approach. We went through the literature to documentthe shareholder value related issues in order to get basis information about theresearch issue. We also used a descriptive approach during the theoretical partwhere we give a general view on the existing ways of creating shareholdervalue and the existing methods of valuing shareholder value creation. Ourthesis has also a prescriptive part where we explain what ought to be done inthis area of creating and measuring shareholder value. We believe theseapproaches are best for our study since they allow us to better documentourselves, describe and prescribe furthermore, all these are vital in answeringour research issue.Why is creating shareholder value suddenlybecoming a credo in corporate boardrooms?There are many reasons for this renewed emphasison measuring and managing shareholder value,prominent among which are the following:l Capital markets are becoming increasinglyglobal. Investors can readily shift investments
to higher yielding, often foreign, opportunities.l Corporate governance is shifting, with ownersnow demanding accountability from corporateexecutives. Manifestations of the increasedassertiveness of shareholders include thenecessity for executives to justify their compensationlevels, and well-publicized lists ofunderperforming companies and overpaidexecutives.l Executives are concerned with self-preservation.Well-publicized hostile takeovers haveserved notice to all levels of management thatweak financial performance is unacceptableand may precipitate a fight for corporate control.This potential loss of control has motivatedmany executives to better understand theimportance of measuring and managing shareholderexpectations.There is also considerable dissatisfaction withexisting accounting-based earnings and returnmeasures. Evidence is mounting that accountingmeasures such as earnings per share (EPS) andprofit or growth in earnings do not take intoaccount the cost of the investment required torun the business. Similarly, return-based measures,such as return on assets, often motivate managers to make short-term dysfunctionaldecisions that encourage underinvestment.Furthermore, neither earnings nor return measuresappear to correlate well with actual marketvalues of companies.II. SCOPEThis Statement compares and contrasts variousmeasures that claim to quantify management’sshareholder-value-creation abilities and describesthe issues and challenges faced in order toimplement an operating paradigm resultingfrom these measures—value-based management(hereafter referred to as VBM1).This Statement applies to all firms, private andpublic, large and small, whose managers areinterested in creating value for their shareholders/owners. It will help management accountants andothers to:l understand the fundamental concepts ofshareholder-value creation;l link value creation to shareholder-wealthmaximization;l unravel financial and operational drivers thatcan lead to improved performance and therebyimprove shareholder-value creation;l understand the differences among a variety ofmeasures that assess management performancewithin the context of shareholder-valuecreation and wealth maximization;l appreciate the organizational and managementaccounting challenges in implementing VBM to
improve shareholder-value creation; andl broaden shareholder and management awarenessof the importance of shareholder-value creation.Value based MethodsValue based management could be claimed to be evolutional in terms of its break withpast management accounting bases of performance measurement. There are numerousdifferent VBM techniques, including residual-income type approaches, such as economicprofit and EVA, shareholder value added approaches, and cash flow return oninvestment (CFROI). The key advantage of applying VBM techniques is that it canaffect the behaviour of an organisation. Critical to the successful adoption of VBMtechniques is actually changing the behaviour of employees so that VBM can be used as astrategic tool