We thought we'd briefly relay an important message from one of his articles published last August in the Financial Times regarding senior executives managing a business for stock price versus managing for shareholder value - Talking head: Managing for shareholder value is still key. FT log in is required (free), but here are some highlights directly from the article:
- The core of the problem is what managing for shareholder value means. Messrs Welch, Martin and others imply it is about maximising the short-term stock price. Companies that manage for shareholder value, the thinking goes, do whatever it takes to engineer an ever-higher market price. That is a profound misunderstanding.
- Executives create shareholder value when they allocate capital so as to maximise the present value of long-term free cash flows. These decisions include investments in capital spending, mergers and acquisitions and share repurchases. The premise is that if a company builds value, the stock price will eventually reflect that value. Executives adhering to shareholder value principles manage for value, not price.
- In an attempt to increase their company’s stock price executives typically focus on three levers; earnings per share management, equity-based compensation, and investor communications. Take EPS management. When surveyed, a vast majority of executives cite EPS as the most important measure they report. But the link between EPS and value is at best tenuous, and there is a wide range of corporate decisions that can increase earnings but decrease value.
Disclosure: long SOFO, FLWS, EBAY, YHOO.
© 2010 Jeffrey Walkenhorst
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