How top companies create shareholder value.

• Author: Schneider, Alan J.

How top companies create shareholder value

A survey of senior financial people at some of the nation's largest corporations reveals the most popular strategies for boosting a firm's share value. The 1980s ushered in the widespread resurrection of a founding corporate objective: to increase shareholder value. This basic guiding principle, upon which every business entity initially is established, seeks to provide investors with returns to compensate for the risks they assume through their investment.

The factors contributing to this renewed focus on enhancing owner's worth reflect a variety of influences. Firms exist with the support of and attention to several constituencies: customers, suppliers, employees, communities, shareholders, and other stakeholders. Although complacency in addressing any of these groups can lead to dire consequences, corporate managements must adjust priorities to respond to changing pressures.

One of the most significant areas of concern to corporate management, one that erupted and gained accelerating momentum during the 1980s, is the wave of takeovers, mergers, and restructurings. The potential threat of losing control over the activities of a business has prompted managers to keep a keen eye on how their performance impacts the rather elusive target of enhancing shareholder value.

It's true that market prices for publicly traded equity securities are subject to macroeconomic fluctuations, takeover speculation, and specific industry or company developments that can lead to significant volatility, as evidenced most recently by the October 13, 1989, stock market tumble. But ample evidence exists to support the long-term rationale of prices based on prior achievements and, more important, expected future performance levels.

Since the conclusion of the 1981-82 recession, corporate after-tax profits, adjusted for inventory valuation and capital consumption, have grown slightly more than twofold to $195 billion. During this same eight-year time span, the Dow Jones Industrial Average has leaped from 1,000 to 2,700. Given that performance does drive shareholder values, then the real issues facing an organization are the appropriate selection and successful execution of those strategies that will contribute to the performance required for the maximization of shareholder worth.

There are several schools of thought on how performance should be evaluated and linked to the creation of shareholder value. One school holds that achievements are adequately measured and communicated in the context of the classic accrual-based accounting model. The keys to prompting an upward appraisal of value are growing earnings per share and returns on assets and capital employed.

Another school of thought that has recently gained attention focuses on cash-generating...