Ten Ways to Create Shareholder Value by Alfred Rappaport.
“I should point out that no company- with the possible exception of Berkshire Hathaway- gets anywhere near to implementing all these principles”
“I should point out that no company- with the possible exception of Berkshire Hathaway- gets anywhere near to implementing all these principles”
1. Do not manage earnings or provide earnings guidance
If a company doesn’t follow this principle it most likely won’t follow the rest
If a company doesn’t follow this principle it most likely won’t follow the rest
2. Make strategic decisions that maximize expected value, even at the expense of lowering near term earnings
Misaligned management can choose not to partake in value creating projects because they will lower near time earnings.
Companies must evaluate strategic…
Misaligned management can choose not to partake in value creating projects because they will lower near time earnings.
Companies must evaluate strategic…
decisions by measuring the expected incremental value of future cash flows rather than their effects on reported earnings
3. Make acquisitions that maximize expected value, even at the expense of lowering near- term earnings
Record high amounts of cash and low debt levels have resulted in more companies participating in M&A’s.
Record high amounts of cash and low debt levels have resulted in more companies participating in M&A’s.
4. Carry only assets that maximize value
Companies must focus on high value- added activities (eg. R&D) and outsource low value added activities( eg. Manufacturing).
Companies must focus on high value- added activities (eg. R&D) and outsource low value added activities( eg. Manufacturing).
5. Return cash to shareholders when there are no credible value- creating opportunities to invest in the business
Companies shouldn’t just sit on huge piles of cash, they should return this cash to shareholders. They can return this cash via:
a.) Dividends
b.) Buybacks
Companies shouldn’t just sit on huge piles of cash, they should return this cash to shareholders. They can return this cash via:
a.) Dividends
b.) Buybacks
6. Reward CEO’s and other senior executives for delivering superior long term returns
Stock options have proven to be an ineffective vehicle for motivating long term behavior. To circumvent this, companies can use discounted indexed-option plans/ discounted equity risk option
Stock options have proven to be an ineffective vehicle for motivating long term behavior. To circumvent this, companies can use discounted indexed-option plans/ discounted equity risk option
plans. These plans only reward executives if the companies shares outperform the index of the company’s peers.
7. Reward operating- unit executives for adding superior multi year value
8. Reward middle managers and frontline employees for delivering superior performance in the key value drivers that they influence directly
9. Require senior executives to bear the risk of ownership just as shareholders
Companies should set minimum ownership guidelines for their executives .
Companies should set minimum ownership guidelines for their executives .
10. Provide investors with value relevant information
That’s all for today. Please like, follow and retweet.
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