How is shareholder value defined? Shareholder value is the worth investors receive for buying and owning stock in a business. To increase shareholder value, companies must earn a return on the invested capital higher than the cost. Companies can only increase shareholder value when they make a profit. The question then becomes how to maximise profits.
Prioritise value over earnings
Everyone involved with the stock market over the last year will shake their heads and go wobbly in the knees when asked about the market’s volatility. Things seemed more stable recently, but the lesson is still something to consider in shareholder value.
Although a company can often earn quick cash for shareholders, the focus should stay long. The volatility mentioned a moment ago can lose value as quickly and efficiently as gain it. Actual cost and profit take much longer and require a disciplined approach by management against the impatience and pressure of shareholders for quick results: growth and stability equal long-term profit and a higher ROI.
Create strategies that build value
Many companies maintain the strategy of basing their decisions on short-term earnings. What they should do is focus on tomorrow. Decide by looking at future earnings and cash flow. Measure and predict the future value of today’s decision?
Only keep assets that maximise value
Sometimes companies have trouble deciding what assets are worth keeping and which are not. How can they answer this question and identify the capital worth holding? According to Warren Buffett, Berkshire Hathaway’s answer is to analyse everything. And then set up a regular system of monitoring buyers. Ask the question; are they willing to pay more than the business is worth on paper for all aspects of its assets, and if not, which ones?
Each management level, top, middle, and lower, should receive significant rewards as an incentive to strive for excellent results. These rewards should motivate but also focus on improving shareholder value. Think outside the usual box of stock options and put some thought into unique opportunities for each management level. Top management should assume at least some same risk similar to investors.
Lower the cost of capital
As reported by the AFR, the cost of debt is the interest rate on loans from all sources. The rate considers risks of nonpayment and collateral requirements. If the company can lower the risk, and find alternative capital with a lower rate, the organisation could reduce the amount of the payment.