“Shareholder Value” as a Criterion for Assessing Company Performance

The ultimate goal for any business establishment is to make a profit. A company’s growth and performance are always pegged on the shareholders’ value. The success of a company is measured by its ability to enrich its shareholders. The management of any company should strive to achieve this noble goal. This is done through dividends or making the price of their stock increase. The management should act in the interests of the shareholders by increasing the rate of returns to their share capital. The shareholders’ claim in the company should generate higher returns than what the shareholders would earn if that money was invested in other types of investment of the risk. The management should understand the strategies and drivers necessary to maximize the shareholders returns. For a company to increase the worth of its shares, the managers should be able to increase the company’s revenue by increasing the sales, lowering the operating costs and increasing capital expenditure by increased investment in working capital. They should also value the cost of capital so that the company is not financed from high-interest loans. The company should also be in a position to compete competitively over a period of time. The company should make use of the competitive advantage period. The managers should focus on long-term profit maximization as this is the only way to increase the worth of the shares (Rappaport, 1986, p.7).

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The company must cultivate a good reputation by offering high-quality products and maintaining a good relationship with the environment. Besides maximizing the shareholders’ value, the company must serve the needs of all the stakeholders. The company must generate a good corporate social responsibility so that it can create a good working environment. The company must have a good relationship with the local community so as to enjoy its goodwill in its effort to attain its goals. The company should increase its production capacity through research and human resource development. A well-trained and motivated workforce will guarantee good quality and high outputs. Similarly, the management should work out ways and means to reduce costs while still maintaining the quality of the products. High-quality products and good corporate social responsibility develop a good reputation and hence increase the company’s competitive advantage over its competitors in the future. For it to maximize the shareholders’ value, the company must create shareholder’s value by generating revenue that is more than the cost of capital. The company must evaluate the amount of capital employed and the cost of capital in order to establish whether shareholders worth is increased. The company should develop and put into practice management procedures directed at increasing shareholders value. This is best done when the management gathers all important information regarding the market. The shareholders should also institute internal control procedures aimed at forcing and encouraging the management to increase the value of the share. This changes the company culture through creating value managers. The managers of a firm can increase the value of the shareholders equity by instituting intellectual property rights to their products. This is done through acquiring of patent strategies which aim at increasing defense against any possible product threat from competitors. The company should also negotiate with potential competitors to jointly use the patented product. The company should strive to acquire as many patents as possible (Prahalad, 1994. pp.0-42).

The management should initiate cost-effective methods in the management of its portfolios. This involves careful selection of patents and distributing patents in various regions while monitoring the cost factor. The company can increase its profit margin through increased sales of patents and instituting lawsuits against other firms that violate its patent rights. Through the acquisition of patent rights, the company can use them as security for acquiring loans. The management can also increase the shareholders’ equity through mergers and acquisitions. The company can integrate with other companies that hire their services and take advantage of using their patents to the benefit of the shareholders. The company should be in a position to focus on the future and develop the necessary technologies aimed at developing products that will meet the consumers’ needs. To effectively increase the value of the shareholders wealth the management should carry out a situation analysis, evaluate the company’s performance and carry out competitors analysis on the basis of internal and external environments. This should be followed by setting up of objectives based on the laid down structures within a set time frame. The objectives should be in sort term and long-term basis. This involves setting out vision and mission statements. The objectives should provide a base for a strategic plan. This should be a detailed plan on how to achieve the set objectives. The management should have in place the required resources in terms of time, finance, technological and manpower. It should from time to time, change its structure and methods of operation by distributing work commensurate with qualification or by organising work into groups. Each group is allocated a specific team. This assists the management to compare results, asses the efficiency of the process and institute the best practices that will steer the company into great heights (Prahalad, 1994. pp.1-63).

To effectively institute the required programs, resources must be provided. During the implementation process the management should take into consideration all the problems associated with the process such as deteriorating human relations, and poor employees’ communication. The management should re-evaluate the marketing strategy especially for the timing of launching of its new product with emphases to its competitors. The company should implement its strategies without disclosing the process to the competitor’s awareness. The management should instill consistent tactical and strategic measures to all employees in order to achieve the intended goals. Once the company succeeds on formulating the policy, the next thing is to evaluate the strategy so as to determine whether the intended objectives will be achieved. The management needs to evaluate its strengths, weaknesses, opportunities and threat through swot analysis. The strategic options taken must be evaluated against its suitability, feasibility and acceptability. The strategy taken should identify the companys major competencies and then bring together all resources necessary to add value and increase the companys competitive advantage. This can be done through product innovations, changing of organization structure and increasing the companys reputation. The strategic plan should not be based on the managers perspective but on consumers observations and recommendation so that the implementation of the strategy is based in the mind of the customer. The management must make sure that the strategy addresses the fundamental issues that the company needs to address. This should be in relation to whether the strategy is economically viable, whether the company would enjoy the economies of scale and scope as well as build on experience economy (Lazonick, & O’Sullivan, 2000. pp.0-35).

The management should also take into account whether the strategy implementation would be suitable in addressing the environmental and capabilities associated with the business. Every plan taken to increase the share holders’ wealth should be feasible. The resources required should be available and obtainable. The necessary resources such as finance, appropriate labour, data and time should be available. The feasibility of the strategy can be evaluated through ways such as cash flow analysis, forecasting of future changes in the market and by conducting a break-even analysis through resource deployment techniques. The strategy adopted must be acceptable to all stakeholders in the organization. The shareholders should be consulted to give their acceptance to the expected performance of the company. The management should analyse the risks, against the returns expected and evaluate the shareholders reactions towards the strategies to be adopted. The share holders, the employees and the customers have varied expectations for the company. The management must strike a balance between the requirements of the various stakeholders, both, financial and non-financial and develop a strategy that guarantees maximum benefit to all groups. The shareholders always look forward to measures that would increase their wealth, the customers’ looks forward to getting good products which proves the worth for their money while the employees look forward to career development as well as good working environment coupled with good pay. Acceptability of a strategy is also linked to the risks associated with adopting such a strategy. Failure of a strategy can be very detrimental to the operations of the company. This can lead to financial and non- financial loss. The stakeholders’ reaction especially the shareholder may support or disagree to adoption of a strategy. The share holders may oppose the efforts of the company to issues new shares or a planned merger. Whichever strategy the company takes, the ultimate objective is to increase the value of the company shares (McLaney 1997. pp.24-127).

The company can use the bottom-up technique. This is where the employees are given the privilege to give their views by submitting their proposals to the management. The managers then evaluates the proposals on financial criteria bases using either rate of return or the cost benefit analysis and takes the proposals that are in line with the objectives of the company. The management can decide to use the top-down process. The top level managers form the strategic planners. They decide on the strategic actions to take without consulting the junior employees. The strategic management organ of any company is responsible for directing the values, culture, goals and missions of the company. Within the corporate strategy, there are business strategies that are responsible for developing functional strategies as well as competitive strategies. Under the corporate strategy, the business is able to define clearly the type of business the company is involved in and the way to carry out its competitive advantage in a view to increasing the shareholders wealth. Business strategy deals with collective strategies of a strategic business firm within an expand company. The business strategy formulated should aim at cost cutting through cost leadership or product differentiation if the firm has to achieve competitive advantage and increased long-term rates of return. The firm should formulate functional strategies that defines those strategies the company can use in developing new products, such strategies include, market strategies, financial strategies, technology management, legal strategies and human resource strategies. The focus should be in developing short term and medium term plans which are aimed at achievement of the overall companys objectives. These strategies should be in commensurate with the overall aim of the company. The company may form strategic business units which are autonomous in operations. They are responsible making decisions, setting of prices for their products, hiring and staff development and drawing up its own budgets. The units are required to obtain the highest rate of returns on capital in line with the corporate goals (Benn, 2006, p. 69).

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The technology strategy assists the firm to acquire the necessary technology across board with an aim of producing high quality goods at low costs and hence guarantee high returns on capital invested. As the market share of a company grows, the rate of its profit increases. A large market share enables the company to enjoy economies of scale resulting to increased profits. Increase in profit strengthens the share capital of the company which results to an increase on share value of the company. A higher market share enables the company expand its growth strategies. This results to both vertical and horizontal incorporation. In an effort to diversify and increase it capital base, the company may consider merger and acquisitions or operate as joint ventures so that it can better penetrate the market and increase its sales while at the same time lower its production costs (Buckley, 2004, pp.56-257).

The firm can develop strategies that will enable it dominate the market through acquiring competitive powers over its competitors. The management may decentralize the company into strategic business units which are semi-autonomous. These units are supposed to act like a definite business unit s although with a certain degree of centralized support. Each unit is supposed to provide the maximum returns depending on the nature of the market served. The management should focus on investing in areas that maximize returns while at the same time minimizing risks. This is done through cautiously choosing the best assets. The firm can diversify its investment by carefully selecting a wide range of investment assets with lower risks than any single asset. Assets should not be selected on their own rather as investment portfolio, while considering how the price of an individual asset changes with respect to changes in price of every other asset in the portfolio. In any investment, the investor must consider the risk associated and also the returns to be realized from such an investment. Investments that offer good returns always have high level of risks.

The firm should balance between the expected returns and the associated risks. For any risks, the management should take a portfolio that guarantee the highest possible returns or take a portfolio that guarantee the lowest amount of risks for any given returns. Through this analysis, the company can be able to develop the best diversification strategy (Roe, 2005, p. 81).

The company in its effort to increase the shareholders value must also take into account all other factors that affect its operations. Such factors can increase or lower the amount of profit made by the company. The factors include political, economic, social technological, environmental and regal. The government influence and interference of the economy must be put into consideration. Political factors such as political stability, tariffs, labour laws, tax systems, environmental conservation laws and general trade restrictions affects how business operates in that economy. The government may interfere in the market directly either to provide or promote consumption of a specific commodity or lower its consumption rate. The government has great influence on provision of public goods and utilities which also affects the environment in which the business is operating. If the government promotes consumption of a product that a certain firm is offering, the sales are greatly increased and hence a good profit margin. This directly translates to a rise in the shareholders wealth (Roe, 2005, p. 86).

The economic factors on the other hand include the rate of economic growth in the entire economy, the cost of capital, the inflation rate and the exchange rate between that economy currency and others. The management must put all these economic considerations into account while making its decisions. Interest rates affect the cost of capital. If the rate of capital is high, the firms may not be able to obtain the necessary capital for various operations like expansion programs. When the interest rates are low the cost of capital is also low and hence the firm can be able to borrow large amount of capital for its development programs. The rate of economic growth of an economy affects the sales of the firm. If the firm is located in a highly developed economy, it means that the purchasing power of the customers is high and this translates to more sales. Consequently, if the rate of economic activities in the economy is low, the purchasing power of the customers is low the market size is small and hence low sales.

The price of exporting goods is usually proportional to the exchange rates. If the exchange rate is not favourable the exporting firm may experience high costs and hence may not make good profits from exports. This intern lowers the amount of trade outside a particular economy. The price of imported goods is also affected by the exchange rates. The inflation rate may positively or negatively affect the profitability of a firm. A high inflation rate means high prices for goods and services. High prices results to generally low demand for goods and services. This greatly lowers the firms sales. High inflation rate also lowers the value of the currency. Devaluation of the currency lowers the worth of the shares of a company hence lowering the net worth of the company. The company should be able to forecast such future uncertainty and develop products that are not highly affected by these shortcomings as well as investing in economies that guarantee high returns. The company must also consider its social relationship with the environment in which its operating. It should analyse the cultural aspects and the demographic factors of the population in the economy in which its operating. Aspects such as population growth rate, age and sex distribution and career aspects have to be analysed (Grundy, 1998, pp.13-216).

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The company must analyse changes in factors that would affect the demand and subsequent consumption of the companys products. The company should adjust its production techniques in order to produce goods and services that are in line with the needs of the customers. The demographic trends also dictate the goods the firm will produce. The composition of the population may also make the management change its management strategies in order to effectively deliver and ensure maximum returns to the share holders. For example, if the population majority consist of aged people; the firm may face increased cost of labour or low work force. The firm can overcome this problem by recruiting old employees. For a firm to competitively compete with its rivals, its products must seem superior to the competitors. This can only be done through employment of the most recent technology. The technological factors should encompass both environmental and ecological aspects. The company should keep its production in line with technological change. High level of technology may become a barrier to entry by other firms and hence this keeps the competition low. The rate of technology also dictates the minimum production level and decisions in a company. Technology always results to innovation which intern raises the quality of the product and hence more sales. Most businesses are affected by environmental factors such as weather and climate change. Most industries that deal with production of primary products are affected by environmental changes. Such industries include farming and tourism. The management should put into place strategies that should overcome risks associated with harsh environmental conditions in order to reduce their negative influence on the investment programs of the firm (Atrill, P. 2004. pp.3-95).

The management should be able to predict climate changes and how it affects the operations and the quality of the products offered. The company should be able to address legal factors that can affect the normal operations of the company. These factors include consumer law, health and safety laws and employment laws. In every economy, there are laws that are meant to protect consumers from exploitation. The management should strive to meet these conditions for its product to sell. If the companys products do not meet the set health and safety laws, consumers will shift their consumption to the competitors’ products that seem to be of high quality. This in tern lowers consumption and hence returns to the company. The management should also be acquainted with employment laws so as to prevent any incidents that would disrupt the production process such as incidence of strikes or low morale to the employees. Besides maximizing returns for the shareholder through direct investments, the management can increase the share holder’s wealth through such practices that makes the operational environment of a company conducive. This include adherent to law, enhancing ethical norms and embracing international standard. The company can achieve this by taking responsibility of its activity to all the stakeholders and the public in general. The company should conduct its business in a manner that upholds public interest. This is achieved by initiating projects that support community growths while at the same time do away with practices that would cause harm to the public. A company that upholds good social and environmental performance always performs well financially in the long-run. A company with a good corporate self regulation is able to recruit and retain good employees as they feel secured and motivated. Such employees are able to produce maximum hence increasing the output of the company (Bender, & Ward, 2008, p. 17-21).

A good corporate strategy improves the way the employees perceive the company and therefore the public at large. The management can manage potential risks by improving the reputation of the company. Good company reputation wins the customers trust in their products resulting to increased sales. Reputable companies provide good returns to the shareholders investment. A company with a good corporate regulation such as the coca-cola company is able to build customer loyalties and reduces competition of its product on customers’ minds. The customers are able to differentiate brands due to a good reputation for good practice and integrity of the company. Large multinational companies have taken the initiative of increasing their direct involvement in community affairs in which they operate. They have initiated community development project. They offer funding to these projects and educate the community on maters that would assist them raise their living standards. Majority of these projects are in developing countries especially in Africa. Through these projects the locals are able to earn income and hence increase purchasing power. The firm, through direct contact with the community is able to build customer loyalty to its product. The firm is able to enlarge the market for its products resulting to increased sales volume. It is therefore evident that to a large extent the use of shareholder value remains the appropriate criteria for assessing the company performance since any activity initiated by the company directly or indirectly is geared towards increasing the net worth of the shareholders value ( Graham , & David , 2000, pp.6-98).

Reference list

Atrill, P. (2004) Financial management for Non-Specialists 2nd ed. London financial times prentice Hall.

Bender, R. & Ward, K. (2008) Corporate Financial Strategy”, 3rd edition, p. 17- 21.

Buckley, A. (2004) multinational finance, 5th ed. Harlow, financial times, prentice hall. Graham , B. & David , D. (2000) Security Analysis: Principles and Techniques, a classic study of how to analyse companies prior to investment, Second Edition

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Grundy, T. (1998), exploring strategic financial management. London Pearson Education.

Lazonick, W. & O’Sullivan, M. (2000) “Maximizing shareholder value: a new ideology for corporate governance”. Journal Economy and Society 29 (1): 13 35. “Digital object identifier”.

McLaney J. (1997) Business finance theory and practice 4th ed. London, Potman.

Prahalad, C. (1994) ” Corporate Governance or Corporate Value Added. Rethinking the Primacy of Shareholder Value “. Journal of Applied Corporate Finance 6 (4): 40- 42. “Digital object identifier”.

Rappaport, (1986) Creating shareholder value: The new standard for business performance. New York: Free Press. “International Standard Book Number”.

Roe, M. (2005) Corporate Governance- Political and Legal Perspectives. London Edward Elgar Publishing Limited.

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