shareholder - Blog - Global Risk Community2024-03-28T08:57:52Zhttps://globalriskcommunity.com/profiles/blogs/feed/tag/shareholderShareholder Value Traps: How to Evade Them and Focus on Value Creation for Your Organizationhttps://globalriskcommunity.com/profiles/blogs/shareholder-value-traps-how-to-evade-them-and-focus-on-value2020-09-19T07:03:24.000Z2020-09-19T07:03:24.000ZMark Bridgeshttps://globalriskcommunity.com/members/MarkBridges<div><p><a href="{{#staticFileLink}}8028335301,original{{/staticFileLink}}" target="_blank"><img class="align-right" src="{{#staticFileLink}}8028335301,original{{/staticFileLink}}" alt="8028335301?profile=original" width="350" height="400" /></a>Changing industry ecosystems and competition today demand from the organizations to undergo strategic shifts. The purpose of a company is undergoing <a href="https://flevy.com/browse/stream/transformation">Business Transformation</a> from serving the interest of shareholders to serving all stakeholders that influence the organization.</p><p>Shareholders are often considered the only stakeholders that invest in a business. Senior management needs to be cognizant of the importance of shareholders as well other stakeholders who create value for the organization. They should work on building a collaborative <a href="https://flevy.com/browse/stream/culture">Organizational Culture</a> and paying heed to the welfare of all those groups that play a role in organizational growth.</p><p>This warrants a thorough evaluation of all stakeholders, their long-term interests, and <a href="https://flevy.com/browse/stream/value-creation">Value Creation</a>—or Value Destruction—potential for the organization. But first, this calls for finding answers to the following key questions:</p><ul><li>Who creates the most value for the organization?</li><li>Who among the stakeholders typically secure the best deals from the organization?</li><li>Who is the victim of having the worst deals from the organization?</li><li>Who among the stakeholders is potentially untrustworthy?</li><li>Are there any intermediaries or stakeholders fulfilling their personal agendas?</li></ul><p>Answering these questions is critical for the executives, otherwise they may risk falling into <a href="https://flevy.com/browse/flevypro/shareholder-value-traps-5239">Shareholder Value Traps</a>. Recognizing and understanding stakeholder value traps while managing stakeholders' various interests helps executives achieve shared and individual long-term goals. These 5 common traps prevent stakeholders’ interests to get integrated with the interests of the organization and destroy the value of a company if overlooked:</p><ol><li><strong>Ignoring cash-flow driving stakeholders while distributing cash</strong></li><li><strong>Miscalculating reaction from stakeholders</strong></li><li><strong>Supporting under-performing units</strong></li><li><strong>Conceding to willful vulture capitalists</strong></li><li><strong>Misjudging intermediaries role in transactions</strong></li></ol><div class="wp-block-image"><a href="https://flevy.com/browse/flevypro/shareholder-value-traps-5239"><img class="wp-image-7377" src="https://flevy.com/blog/wp-content/uploads/2020/09/Shareholder-Value-Traps.png" alt="" /></a></div><p> </p><p>Let’s discuss 3 of these stakeholder traps individually.</p><p><strong>TRAP 1 – Ignoring cash-flow driving stakeholders while distributing cash</strong></p><p>Shareholders are often treated as the critical drivers of long-term cash flows. However, they are often short-term cash flow generators, whereas other stakeholders who provide their input for the organization in the form of their competencies and experience deliver long-term value. These real contributors should be given top priority when distributing cash on earnings. Underestimating or failure to identify the real long-term cash-flow generators can be a fatal value trap for an organization.</p><p><strong>TRAP 2 – Miscalculating reaction from stakeholders</strong></p><p>Another trap that most executives fall victim to is discounting potential backlash from weak stakeholders upon unfair distribution of cash / incentives. Mining value from these victims to support shareholder disbursements can be equally detrimental, as annoyed stakeholders—with the help of social media and NGOs—, legal battles, and financial penalties can devastate a firm’s reputation and financial health.</p><p><strong>TRAP 3 – Supporting under-performing units</strong></p><p>Senior executives and boards at some organizations foster free riders—stakeholders that sap more benefits from the enterprise than the business they generate—at the expense of long-term value shareholders. Free riders include an under-performing department close to the board, or a dwindling business unit that is part of a profitable section and whose financials are not categorized separately.</p><p>Continued support to these free riders is often at the cost of allocating resources to other potentially more profitable ventures, and this practice has led many companies to losses and even bankruptcies.</p><p>Interested in learning more about the <a href="https://flevy.com/browse/flevypro/shareholder-value-traps-5239">Stakeholder Value Traps</a>, types of organizational stakeholders, and strategies to stay clear of the Stakeholder Value Traps? You can download <a href="https://flevy.com/browse/flevypro/shareholder-value-traps-5239">an editable PowerPoint on <strong>Shareholder Value Traps</strong> here</a> on the <a href="https://flevy.com/browse">Flevy documents marketplace</a>.</p><h3><strong>Are you a Management Consultant?</strong></h3><p>You can download this and hundreds of other <a href="http://flevy.com/pro/library/frameworks">consulting frameworks</a> and <a href="http://flevy.com/pro/library/consulting">consulting training guides</a> from the <a href="http://flevy.com/pro/library">FlevyPro library</a>.</p><p> </p></div>Traditional Value-Based Management vs. Value Creation through Relative Total Shareholder Returnhttps://globalriskcommunity.com/profiles/blogs/traditional-value-based-management-vs-value-creation-through2019-08-07T18:48:44.000Z2019-08-07T18:48:44.000ZMark Bridgeshttps://globalriskcommunity.com/members/MarkBridges<div><p><a href="{{#staticFileLink}}8028301079,original{{/staticFileLink}}" target="_blank"><img class="align-right" src="{{#staticFileLink}}8028301079,original{{/staticFileLink}}" alt="8028301079?profile=original" width="300" /></a></p><p><a href="https://flevy.com/browse/flevypro/value-based-management-vbm-2655">Value-Based Management (VBM)</a> has been regarded traditionally as a tool to help investors evaluate firms, optimize performance management, and maximize shareholder value.</p><p>However, there are mixed opinions on whether to utilize <a href="https://flevy.com/browse/flevypro/value-based-management-vbm-2655">VBM</a> as a mandatory investment or management tool. Many investors, analysts, and executives, to this day, are skeptical of the influence and role of VBM in confronting the dot-com bubble or other financial downturns. They are even cynical of the efficacy of VBM as a robust management approach for the future or its effectiveness in creating competitive advantage for them.</p><p>The following are some shortcomings associated with the traditional VBM approaches that leaders should negotiate:</p><ul><li><strong>An inadequate link between VBM practices and capital markets realities</strong>—absence or lack of analysis of the capital markets to expose gaps between a company’s intrinsic value and actual stock price.</li></ul><ul><li><strong>Aligning VBM with the organizational systems and its culture for value creation</strong>.</li></ul><ul><li><strong>A broken process for managing the controls that govern value creation</strong>—traditional VBM offers rich insights on managing economic principles, but lacks a process on how to further align strategic, cultural, and behavioral levers.</li></ul><h3><strong>Value Creation Framework</strong></h3><p>The lack of trust in the effectiveness of VBM necessitates formulating a more thorough, fact-based approach to executing VBM. In developing a value creation agenda, it is quite uncomplicated to conceptually convince managers and employees that it is their main shared focus, but the core challenge is to devise a practical and integrated implementation approach.</p><p>The <a href="https://flevy.com/browse/flevypro/value-creation-framework-series-primer-3911">Value Creation Framework</a> depends on 4 <a href="https://flevy.com/browse/flevypro/value-creation-framework-series-direct-levers-3912">value creation levers</a> that senior management can pull in order to effectively achieve their value creation goal. These levers are not autonomous and needs to be activated in tandem:</p><ul><li><strong>Operational Effectiveness</strong></li><li><strong>Competitive Strategy</strong></li><li><strong>Portfolio Management</strong></li><li><strong>Investor Strategy</strong></li></ul><p><a href="https://flevy.com/browse/flevypro/value-creation-framework-series-primer-3911"><img class="aligncenter size-full wp-image-5327" src="http://flevy.com/blog/wp-content/uploads/2019/07/Value-Creation-Framework.png" alt="" width="1024" height="768" /></a></p><p>The framework first stresses the management team to agree on the shared aspirations, prioritized levers, and how the headquarters activities are to be aligned with the business units. This entails revisiting the assumptions, priorities, decisions, tools, and culture at all levels across an organization to harness VBM to achieve improved value creation. The framework warrants the VBM approach to be embraced as a culture to maximize value creation--which is measured in Relative Total Shareholder Return.</p><h3><strong>Relative Total Shareholder Return (RTSR)</strong></h3><p>Focusing and aligning the organizations around a shared mission is important for the leadership. Clearly laid out, compelling vision and aspirations—that are reinforced daily—have a profound positive impact on an organization’s value creation potential.</p><p>Value creation best practices necessitate establishing a single, long-term goal—the <a href="https://flevy.com/browse/flevypro/value-creation-framework-series-primer-3911">Relative Total Shareholder Return (RTSR)</a> performance. The Relative Total Shareholder Return reflects a firm’s capital gains plus dividend yield relative to a peer group or market index.</p><p>The RTSR concept is not new, but practically most companies find it hard to implement RTSR as a goal-setting tool. The RTSR should be clearly quantified and communicated across the board as a long-term goal. The RTSR aspirations motivate and empower line management to work as entrepreneurs to achieve it, set objective targets, and connect business unit management to capital markets discipline. If done right, RTSR is a useful method to specify and communicate a firm’s objectives and the supporting <a href="https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-to-improve-strategic-planning">execution plans</a>.</p><h3><strong>Measuring RTSR Objective</strong></h3><p>Measuring the RTSR goal achievement at the corporate level can be done by ranking a firm’s TSR against its peers TSR. A RTSR target can be set to analyze the effect of corporate and business unit plans. This can be done by quantifying a subjective goal—e.g., top half or top quartile TSR—into a specific number. The calculations warrant developing a forward-looking RTSR target on the following 3 footings:</p><ul><li><strong>Anticipated 5-year company cost of equity</strong>—to gather an investor’s view of the risk-adjusted average expected return that a firm or market index is priced to deliver.</li></ul><ul><li><strong>Anticipated spread to achieve relative TSR goal</strong>—calculating stretched, above-average TSR goal needs personal discretion. It can be done through superior performance improvements instead of maintaining superior absolute levels of performance.</li></ul><ul><li><strong>Forward looking 5-year RTSR target</strong>—calculation of this goal requires 2 key considerations: RTSR probability of reaching above-median TSR and benchmarks to meet a cumulative top quartile TSR target over different time periods.</li></ul><p>Interested in learning more about the Value Creation Framework? You can download <a href="https://flevy.com/browse/flevypro/value-creation-framework-series-primer-3911"><u>an editable PowerPoint on</u> <strong><u>Value Creation: Relative Total Shareholder Return</u></strong> <u>here</u></a> on the <a href="https://flevy.com/browse">Flevy documents marketplace</a>.</p><h3><strong>Are you a Management Consultant?</strong></h3><p>You can download this and hundreds of other <a href="http://flevy.com/pro/library/frameworks">consulting frameworks</a> and <a href="http://flevy.com/pro/library/consulting">consulting training guides</a> from the <a href="http://flevy.com/pro/library">FlevyPro library</a>.</p></div>