Shareholder value is a business term, sometimes phrased as shareholder value maximization or as the shareholder value model, which implies that the ultimate measure of a company's success is the extent to which it enriches shareholders. It became popular during the 1980s, and is particularly associated with former CEO of General Electric, Jack Welch.

The term used in several ways:

To refer to the market capitalization of a company (rarely used)

To refer to the concept that the primary goal for a company is to increase the wealth of its shareholders (owners) by paying dividends and/or causing the stock price to increase

To refer to the more specific concept that planned actions by management and the returns to shareholders should outperform certain bench-marks such as the cost of capital concept. In essence, the idea that shareholders' money should be used to earn a higher return than they could earn themselves by investing in other assets having the same amount of risk. The term in this sense was introduced by Alfred Rappaport in 1986.

Definition[link]

For a publicly traded company, Shareholder Value (SV) is the part of its capitalization that is equity as opposed to long-term debt. In the case of only one type of stock, this would roughly be the number of outstanding shares times current shareprice. Things like dividends augment shareholder value while issuing of shares (stock options) lower it. This shareholder value added should be compared to average/required increase in value, making reference to the cost of capital.

For a privately held company, the value of the firm after debt must be estimated using one of several valuation methods, s.a. discounted cash flow or others.

History[link]

On August 12, 1981, Jack Welch made a speech at The Pierre in New York City called ‘Growing fast in a slow-growth economy’. This is often acknowledged as the "dawn" of the obsession with shareholder value. Welch's stated aim was to be the biggest or second biggest market player, and to return maximum value to stockholders.

In March 2009, Welch criticized parts of the application of this concept, calling a focus on shareholder quarterly profit and share price gains "the dumbest idea in the world". Welch then elaborated on this, claiming that the quotes were taken out of context.

Maximizing shareholder value[link]

This management principle, also known under value based management, states that management should first and foremost consider the interests of shareholders in its business decisions. (Although the legal premise of a publicly traded company is that the executives are obligated to maximize the company's profit, this does not imply that executives are legally obligated to maximize shareholder value.)

The concept of maximizing shareholder value is usually highlighted in opposition to alleged examples of CEO's and other management actions which enrich themselves at the expense of shareholders. Examples of this include acquisitions which are dilutive to shareholders, that is, they may cause the combined company to have twice the profits for example but these might have to be split amongst three times the shareholders.

As shareholder value is difficult to influence directly by any manager, it is usually broken down in components, so called value drivers. A widely used model comprises 7 drivers of shareholder value, giving some guidance to managers:

Revenue

Operating Margin

Cash Tax Rate

Incremental Capital Expenditure

Investment in Working Capital

Cost of Capital

Competitive Advantage Period

Looking at some of these elements also makes it clear that short term profit maximization does not necessarily increase shareholder value. Most notably, the competitive advantage period takes care of this: if a business sells sub-standard products to reduce cost and make a quick profit, it damages its reputation and therefore destroys competitive advantage in the future. The same holds true for businesses that neglect research or investment in motivated and well-trained employees. Shareholders, analysts and the media will usually find out about these issues and therefore reduce the price they are prepared to pay for shares of this business. This more detailed concept therefore gets rid of some of the issues (though not all of them) typically associated with criticism of the shareholder value model.

Based on these seven components, all functions of a business plan and show how they influence shareholder value. A prominent tool for any department or function to prove its value are so called shareholder value maps that link their activities to one or several of these seven components. So, one can find "HR shareholder value maps", "R&D; shareholder value maps", and so on.

Criticism[link]

The sole concentration on shareholder value has been widely criticized, particularly after the late-2000s financial crisis. While a focus on shareholder value can benefit the owners of a corporation financially, it does not provide a clear measure of social issues like employment, environmental issues, or ethical business practices. A management decision can maximize shareholder value while lowering the welfare of third parties.

It can also disadvantage other stakeholders such as customers. For example, a company may, in the interests of enhancing shareholder value, cease to provide support for old, or even relatively new, products.

Additionally, short term focus on shareholder value can be detrimental to long term shareholder value; the expense of gimmicks that briefly boost a stocks value can have negative impacts on its long term value.

Alternative: stakeholder value[link]

The intrinsic or extrinsic worth of a business measured by a combination of financial success, usefulness to society, and satisfaction of employees, the priorities determined by the makeup of the individuals and entities that together own the shares and direct the company. This is sometimes referred to as stakeholder value.

However, this concept is difficult to implement in practice because of the difficulty of determining equivalent measures for usefulness to society and satisfaction of employees. For instance, how much additional "usefulness to society" should shareholders expect if they were to give up $100 million in shareholder return? In response to this criticism, defenders of the stakeholder value concept argue that employee satisfaction and usefulness to society will ultimately translate into shareholder value.

See also[link]

Adjusted present value

Economic value added

Enterprise value

Internal rate of return

Financial modeling

Flows to equity

Market value added

Net present value

Sustainable Value

Valuation using discounted cash flows

Time Value of Money

References[link]

Category:Corporate finance Category:Business terms

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Prof. Dr. Dr. h.c. Hermann Simon (born 10 February 1947) is a German author and business leader. He is chairman of Simon-Kucher & Partners, Strategy & Marketing Consultants. Simon is an expert in strategy, marketing and pricing. An ongoing online survey (in German language countries) vote him the most influential management thinker after the late Peter Drucker. Simon has authored numerous books and writes articles for international newspapers and business magazines.

Short Biography[link]

1947 Born in Hasborn/Eifel, Germany.

1966 High School leaving A-levels certificate, Cusanus High School, Wittlich

1967-1969 German Air Force, fighter bomber squadron 33, reserve officer

1969-1973 Studies of economics and business administration in Cologne and Bonn

1974-1979 Ph.D. and qualification as a university professor under Horst Albach in Bonn

1979-1989 Professor at the University of Bielefeld

1989-1995 Professor at the University of Mainz

1983-2002 Various guest professorships and visiting researcher positions: Massachusetts Institute of Technology (1978/79), Vienna Institute for Advanced Studies (1979), Keio University in Tokyo (1983), Stanford University (1984), INSEAD in Fontainebleau (1980–1985), Harvard Business School (1988/89), London Business School (1991–2002)

1985-1988 Director, USW The German Management Institute, Schloss Gracht/Cologne

1985 Founded the company Simon - Kucher & Partners Strategy & Marketing Consultants

1995-2009 CEO of Simon - Kucher & Partners Strategy & Marketing Consultants

Since 2009 Chairman of Simon - Kucher & Partners Strategy & Marketing Consultants

Business Professor, Management Consultant and Author[link]

Hermann Simon’s career has followed three paths: as a management consultant, as an author and as a business professor. His books have been translated into 25 languages and are widely read among managers. An ongoing online survey votes him the most influential management thinker after the late Peter Drucker.

Business Professor[link]

Hermann Simon is also a professor of business and has worked extensively in the field of marketing. Until 1995 he was a professor of business administration and marketing at the Johannes-Gutenberg University in Mainz, Germany. Simon’s academic career began very early: After completing his studies, he started his Ph.D. under the supervision of Horst Albach. Professor Albach significantly influenced his professional development, especially regarding the bridge between theory and practice. Between 1978 and 1980 Simon received a post-doctoral scholarship from the Deutsche Forschungsgemeinschaft (German Research Foundation) and was also a visiting fellow at the Massachusetts Institute of Technology (MIT) during that time. Since then he has been a regular contributor to journals like "Management Science", "Harvard Business Review", "MIT Sloan Management Review" and Journal of Marketing Research. His academic career led him to numerous guest professorships at international universities: Simon was a visiting professor at the Vienna Institute for Advanced Studies in 1979, at the Keio University in Tokyo in 1983 and at Stanford University in 1984. He also taught at INSEAD in Fontainebleau (1980–1985), at Harvard Business School (1988–1989) and London Business School (1991–2002). Between 1984 and 1986, Professor Simon was the head of the European Marketing Academy (EMAC), and between 1985 and 1988 he was the research director of the European School of Management and Technology (formerly the Universitätsseminar der Wirtschaft, or USW) at the Schloss Gracht in Cologne.

While working as an economics professor, his research largely centered on bridging the gap between theory and practice and his approach to research was empirical and decision-oriented. Numerous theoretical concepts were practically applied in his pioneering projects (calculation of expected market reactions, non-linear pricing, product life cycles, bundling).

During his time as the director at the USW (the largest German institute for management training in the mid-1980s), Simon decided to enter the professional business world. In 1985, he founded the management consultancy UNIC, which later became Simon-Kucher & Partners Strategy & Marketing Consultants, together with his former Ph.D. students, Dr. Eckhard Kucher and Dr. Karl-Heinz Sebastian. In 1995 Professor Simon left his university career to dedicate himself full-time to the consulting business as the chairman of Simon-Kucher & Partners.

Management Consultant[link]

Hermann Simon was CEO of Simon-Kucher & Partners Strategy & Marketing Consultant|Consultants since 1995. The company employs 500 professionals and operates worldwide with offices in Amsterdam, Beijing, Bonn, Boston, Brussels, Cologne, Copenhagen, Frankfurt, London, Luxembourg, Madrid, Miami, Milan, Munich, New York, Paris, San Francisco, Singapore, Sydney, Tokyo, Vienna, Warsaw and Zurich.

His consulting firm focuses on strategy, marketing, pricing and sales. Bloomberg BusinessWeek described Simon-Kucher & Partners as a "world leader in giving advice to companies on how to price their products" and The Economist wrote: “Simon-Kucher is the world’s leading pricing consultancy”.

Professor Simon has served as the board member for numerous joint-stock companies as well as boards of trustees. His perception of the German corporate landscape draws strongly from this background. He acknowledges the expertise of German companies in technology and products, but asserts that they still show weaknesses in terms of marketing, customer orientation and service. Compared to companies in the USA, German companies perform poorly in terms of market capitalization. Consequently, Professor Simon sees a great danger of German companies being “colonized”.

Author[link]

Hermann Simon’s books are widely read among managers and have been translated into 25 languages. In March 2011, Professor Simon and co-author Martin Fassnacht were awarded the 2010 Georg-Bergler-Prize for ''Preismanagement''. Carrying with it a €20000 prize, the Georg-Bergler-Prize is the most highly endowed award for European marketing textbooks. In 2006, Simon published ''Manage for Profit, Not for Market Share'', which takes a critical look at the widespread focus on volume and market share and calls for a conscious shift of focus towards profit. Simon’s most well-known publications include ''Think'' (2004), ''Power Pricing'' (1997), ''Hidden Champions'' (1996), ''Hidden Champions of the 21st Century'' (2009) and ''Preismanagement'' (3rd edition 2009). Additional publications include ''Das große Handbuch der Strategieinstrumente'' (2002), ''Das große Handbuch der Strategiekonzepte'' (2000) and ''Simon for Managers'' (2000). Professor Simon has coined a number of phrases which are commonly used in management theory and practice, including “price management”, “hidden champions”, “Servicewüste” and “investor marketing”. Since 1988, Simon has regularly authored a column for the German monthly ''Manager Magazin''. In addition, he is a member of the editorial boards of numerous business journals, including the International Journal of Research in Marketing, Management Science, Recherche et Applications en Marketing, Décisions Marketing, European Management Journal as well as several German journals.

Miscellaneous[link]

Professor Simon was greatly influenced by his long-time friend Peter Drucker, with whom he corresponded for many years and whom he often visited at his home near Los Angeles. Their last scheduled meeting, however, never took place. It was scheduled for November 12, 2005 ─ the day before Drucker died.

Very politically active as a student, Simon is now more critical of politicians. He believes they do not have the necessary competence, particularly concerning economic issues. Furthermore, he deplores the lack of communication between economists and politicians. Simon feels very connected with his place of birth, the Eifel region, and has published the book ''Kinder der Eifel'' in 2008.

Selected literature[link]

Books[link]

(published in 14 languages) (published in 15 languages)

Selected Articles[link]

Other[link]

References[link]

External links[link]

Simon-Kucher & Partners Official Website

Hermann Simon's Official Website

Category:Living people Category:1947 births Category:Academics of the London Business School Category:University of Cologne alumni Category:University of Bonn alumni Category:University of Bielefeld faculty Category:University of Mainz faculty Category:Harvard Business School faculty Category:Stanford University faculty Category:German non-fiction writers Category:German businesspeople Category:German economists

de:Hermann Simon (Manager) fr:Hermann Simon it:Hermann Simon