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    2022 - Chapter01 - Why Value ValueValue

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    The document discusses the shareholder value framework and long-term value creation. It argues that maximizing long-term shareholder value, not just short-term gains, is the proper objective for companies. Pursuing long-term revenue growth and returns on capital creates more value over the long run for shareholders and society. While other stakeholders are important, the shareholder framework provides the clearest guidance for prioritizing decisions. Governance reforms could help companies focus more on long-term value and less on short-term pressures.

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    2022 - Chapter01 - Why Value ValueValue

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    Elias Macher
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    The document discusses the shareholder value framework and long-term value creation. It argues that maximizing long-term shareholder value, not just short-term gains, is the proper objective for companies. Pursuing long-term revenue growth and returns on capital creates more value over the long run for shareholders and society. While other stakeholders are important, the shareholder framework provides the clearest guidance for prioritizing decisions. Governance reforms could help companies focus more on long-term value and less on short-term pressures.

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    The document discusses the shareholder value framework and long-term value creation. It argues that maximizing long-term shareholder value, not just short-term gains, is the proper objective for companies. Pursuing long-term revenue growth and returns on capital creates more value over the long run for shareholders and society. While other stakeholders are important, the shareholder framework provides the clearest guidance for prioritizing decisions. Governance reforms could help companies focus more on long-term value and less on short-term pressures.

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    60 views13 pages

    2022 - Chapter01 - Why Value ValueValue

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    Elias Macher
    The document discusses the shareholder value framework and long-term value creation. It argues that maximizing long-term shareholder value, not just short-term gains, is the proper objective for companies. Pursuing long-term revenue growth and returns on capital creates more value over the long run for shareholders and society. While other stakeholders are important, the shareholder framework provides the clearest guidance for prioritizing decisions. Governance reforms could help companies focus more on long-term value and less on short-term pressures.

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    Business Valuation

    Chapter 1
    Why value value?

    Economics and Business School/Finance & Accounting Specialization


    Instructors:
    Please do not post raw
    PowerPoint files on public

    Chapter 1
    websites. Thank you!

    Why Value Value ?


    The shareholder value framework

    • Academics and even some business leaders have called for companies
    to change their focus from increasing shareholder value to a broader
    focus on all stakeholders, including customers, employees, suppliers
    and local communities

    • Many of theses impulses are naïve. A system focused on creating


    shareholder value is not the problem; short-termism is.

    • The objective should be reformulated: “Maximizing a company’s


    collective value to current and future shareholders, not just today’s”.

    • Creating value for investors shows a clear link with creating value and
    improving the society at large.

    3
    The shareholder value framework

    • Since investors do not have complete information, it’s easy for


    companies to pump up their share price in the short term. This does not
    mean that the stock market is not “efficient” in the academic sense that
    it incorporates all public information. Markets do a great job with public
    information, but markets are not omniscent. Markets cannot price
    information they don’t have.

    • Despite such challenges, the evidence makes it clear that companies


    with a long strategic horizon create more value.

    • We’ve found, empirically, that long-term revenue growth –particularly


    organic revenue growth- is the most important driver of shareholder
    returns for companies with high returns on capital.

    4
    The shareholder value framework
    The shareholder value framework
    The shareholder value framework

    • It is management’s and the board’s task to demonstrate that courage,


    despite the short-term consequences, in the name of value creation for
    the collective benefit of all present and future shareholders.

    • It is also true that for most companies anywhere in the world, pursuing
    the creation of long-term shareholder value requires satisfying other
    stakeholders as well. You cannot create long-term value without happy
    customers, suppliers, and employees.

    • However, the stakeholder approach (defined as running the company in


    away that treats all stakeholder interests equally), does not provide an
    answer to the question of how to prioritize the demand of each group
    and what concrete decision management and boards should take. The
    shareholder model, however, does provide an answer.

    7
    The shareholder value framework

    • This focus on long-term shareholder value can affect negatively some


    stakeholders, but, on the long run, consumers, employees and the
    economy as a whole benefit when unproductive plants and closed and
    employees move to new jobs with more competitive companies.

    • However, it is true that Shareholder capitalism cannot solve all social


    issues: These so-called externalities -for example, carbon emissions-
    are often beyond the ken of corporate decision making because there
    is no objective basis for making trade-offs among parties. Here
    governments should develop incentives to take care of such
    externalities.

    8
    The shareholder value framework

    • Forgetting the principles of value creation brought us to the Internet


    bubble (when managers and investors lost sight of what drives Return
    On Invested Capital) and the financial crisis (when some banks lent on
    the assumption that house prices would only increase).

    • Too many managers continue to plan and execute strategy –and then
    report their performance- against shorter-term measures, particularly
    earnings per share (EPS).

    • Why? Some executives argue that investors will not let them focus on
    the long term (because some short-term-oriented investors will always
    clamor for short-term results); other fault the rise of shareholder
    activists in particular, although the evidence shows that, on average,
    activist investors strengthen the long-term health of the companies they
    pursue.
    9
    The shareholder value framework

    • Changes in corporate governance might help. Board members might


    be required to spend more time on their board activities. Executives’
    remuneration should be linked to long-term

    10
    Main messages during this course on
    corporate valuation
    • The combination of growth and return on invested capital (ROIC),
    relative to its cost, is what drives value.

    • Anything that does not increase cash flows (for example: accounting
    changes, modification in the timing of profits, changes in the ownership
    of claims to cash flows) does not create value.

    • Only if companies have a well-defined competitive advantage can they


    sustain strong growth and high returns on invested capital (ROIC).

    • Empirical observation shows that creating sustainable value is a long-


    term endeavor, that needs to take into account wider social,
    environmental, technological, and regulatory trends.

    11
    Main messages during this course on
    corporate valuation
    • Competition tends to erode competitive advantages and with them,
    returns on invested capital. Therefore, companies must continually
    seek and exploit new sources of competitive advantage if they are to
    create long-term value.

    • To that end, managers must resist short-term pressure to take actions


    that create illusory value quickly at the expense of the real thing in the
    long term. Creating value for shareholders is not the same as meeting
    the analysts’ consensus earnings forecast for the next quarter.

    • That means balancing near-term financial performance against what it


    takes to develop a healthy company tat can crate value for decades
    ahead – a demanding

    12
    Main messages during this course on
    corporate valuation
    • Applying the principles of value creation…

    – sometimes means going against the crowd

    – means accepting that there are no free lunches

    – means relying on data, thoughtful analysis, and a deep understanding of the


    competitive dynamics of your industry.

    13

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