Creating Shareholder Value | Alfred Rappaport

Summary of: Creating Shareholder Value: A Guide for Managers and Investors
By: Alfred Rappaport


Dive into the world of shareholder value (SV) as Alfred Rappaport brings forward the importance of aligning corporate strategies with the long-term best interests of shareholders. The book ‘Creating Shareholder Value: A Guide for Managers and Investors’ explores the shift from short-term, quarter-by-quarter earnings to a focus on longer-term strategies. Understand the forces that led to this change, including the 1980s wave of mergers and the subsequent influence of institutional investors. Discover the key concepts such as corporate value, shareholder value added (SVA), and the role of shareholder value in decision-making. Prepare to learn valuable insights and tools to navigate the complex business arena while keeping shareholders in mind.

The Rise of Shareholder Value

The Shareholder Value (SV) approach has become the norm, where public corporations prioritize making their shareholders wealthier. This change was a result of 1980s corporate mergers and consolidations, which exposed managerial mistakes and led to cheap takeovers. Shareholders have the power to vote out shortsighted CEOs who prioritize quarterly earnings over long-term growth. This shift has led executives to adopt longer-term strategies that align with the investment criteria of their shareholders and given institutional investors greater power in corporate affairs.

Building Shareholder Value and Social Responsibility

Building shareholder value is critical for business success; however, it does not necessarily align with social activism. Companies that prioritize activism over competitiveness risk destroying their business. Executives have a responsibility to keep their company’s finances healthy, which often entails acting socially responsible. Shareholder value added (SVA) measures the value created by a business over a forecasted period. Nearly half of Americans hold shares in public companies, allowing good deeds to reach investors and the public. In a privatized Social Security system, executives may be forced to prioritize shareholder value even more.

Balancing Short-Term Gains and Long-Term Strategy

Companies face an internal dilemma in accepting the shareholder value (SV) approach due to the lure of short-term gains. The focus on earnings-per-share (EPS) numbers and the link between high quarterly profits and executive pay further perpetuate this issue. However, this preoccupation with the short-term can cause managers to sacrifice long-term investments. SV approach considers investments and worth as well as earnings, giving management the ability to estimate the future value results of its strategies. Only investors who correctly anticipate changes in a company’s competitive position can expect to earn excess returns. EPS results are ethereal accounting concepts and can be legally “engineered.”

Driving Business Growth through Shareholder Value Analysis

Companies must develop effective strategies to achieve growth objectives. This involves assessing industry attractiveness, competitive position, and potential sources of competitive advantage to estimate cash flow and decide on viable competitive strategies. One approach to this is using Shareholder Value (SV) analysis, where companies use models like SV methods and Shareholder Value Added (SVA) to determine the most promising financing level and the best use of shareholder value. Analysts can advise CEOs on how to lead the company and how to use SVA data to evaluate and shape its strategic path. SV analysis also helps companies price products efficiently, set dividends, and weigh corporate alliances, spin-offs, mergers, or acquisitions. Overall, SV analysis can help companies drive business growth by ensuring alignment between customer value, shareholder wealth, and employee satisfaction.

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