What is Shareholder’s value? Maximization of shareholders wealth refers to maximizing net worth of the company and its dependent on performance management. This is a result of management’s ability to grow its earnings, dividends and share price. Shareholders wealth is measured by the returns that they receive on their investments. These returns are caused by two sources:
Earnings Per Share (EPS)
Market price of the shares held
Therefore, wealth maximization means maximum EPS plus maximizing the market price of the shares. With greater profit, the EPS goes up, resulting an increase in the price of shares belonging to the shareholders.
How should companies manage shareholder value? Focusing on these three factors will result is maximizing shareholder wealth. 1) Consistent performance 2) Sustainability 3) Growth The value increase come in the shape of appreciation in the market value of the share of the company. As the organization maintains sustainable growth rate, its market perception improves giving rise to business goodwill. Exhibit 1 illustrates examples of shareholder value creation strategies.
Managers should also contemplate on areas that potential purchasers will consider in making acquisition decisions. For companies who aim for maximizing their shareholders value have clear defined strategic plans that are forward looking and focus on long-term sustainable success. They have identified what business do they wish to be in and how to win in a particular industry. This vision has to be shared throughout the organization for the strategy to be successful, so thereâ€™s a sense of belongingness and cohesiveness within the organization.
Exhibit 1 shows examples of shareholder value creation strategies.
Misleading The biggest problem with deliberately attempting to improve a share price is that it’s misleading to the investors. Some organizations will see their share price climb due to clever leadership and an objective evaluation of the company’s worth by the market as a whole.
‘Keep the ball rolling’ Companies have to keep their ‘eye on the ball’ which means remaining focused and managing well. Organization will operate like a well-oiled machine if these little things are taken into consideration. Unfortunately the process breaks down during implementation. Building shareholder wealth is a long term perspective. Commitment and momentum must be sustained over a long period of time.