Three steps to value

Click to follow
Go anywhere in the corporate world these days and it is impossible not to hear the phrase "shareholder value", writes Roger Trapp. Of course, it is obvious that managers are largely there to enhance shareholder value. But the notion has become a mantra because certain consultants claim to have stripped it down to its essentials and made it more achievable.

So much for the theory. As a recent report from PA Consulting points out, this management theorem is little different from most in being more honoured in the breach than in the obeyance.

And consultants from Price Waterhouse have just published a book, In Search of Shareholder Value (Pitman Publishing), that acknowledges that part of the problem may arise from confusion. As they note in the book, there is host of acronyms - ranging from EVA (for Economic Value Added) to CFROI (for cash flow return on investment) - for the unwary to negotiate in getting to grips with the issue.

So, how do you get from just mouthing the words to really doing something about it? PA, which has just published a report on the impact of what it calls the Managing for Shareholder Value approach, recommends going through three stages.

The first is to commit the organisation to it, rather than just talk about it. PA's Mark Thomas says: "It needs to be driven from the top of the organisation because it's very much about getting all the decisions right."

The second is very practical. Go for the "quick-hit" areas first, on the basis that a measurable improvement in one area is more likely to create enthusiasm than a piecemeal initiative across the whole organisation.

PA identifies two prime candidates for the "quick-hit" treatment. First, compensation, where organisations create schemes structured to provide managers with incentives to create shareholder value. Second, business planning, where companies should divert resources to the areas where they will be best used.

The final stage is implementation of the MSV concept on a systematic basis. Senior managers need to ensure that the processes being introduced in all areas are consistent with the original aims. The firm recommends reaching agreement on the principles by asking such questions as "How do we allocate equity to divisions of strategic business units?"

To encourage those that feel that this is all too much trouble, PA reveals that its studies indicate that those using the entire approach have, on average, enjoyed returns 27 per cent higher than those paying lip service.

Comments