Shareholder value
Project management initiative brings a renewed interest among the shareholders. The major investors show more interest by becoming active in the organisation's performance. Earlier punishing the top executives for failing delivery returns was a rare scenario, however currently it is very common. The shareholder value is often an indicative measure to measure the performance. The shareholder value has no clear definition but was generally taken as the measure of whether the organisation had created or destroyed the wealth for their shareholder. In the recent years a more reliable measure has been sought. This includes development of two methods - Market Value Added (MVA) and Economic Value Added (EVA).
As the system of analysis, MVA targets to strip out most of the anomalies developed by the accounting standards to give a correct picture about the shareholder value. The basic calculation is to take the amount of money given to the management which is measured by the adding up the money raised through the shares that have been issued, the borrowings and earnings retained. This gives the measure of how much the outsiders had given to the organisation, since it was found. It then takes the present value of the organisation's shares and the debt to measure how much money the investors could get out of the business. The difference is the MVA which is the measure of how the executives running the organisation have fared with the capital which is under the control since the time of organisation's establishment. If the MVA is positive then it means that the value has been created for the investors. If it has been found negative then it means that the investors' money has been destroyed.
The EVA takes after the tax operating profit for the organisation and also compares it with the cost of capital. The cost of capital is an economic concept which includes more than just the interest paid to the bank and also the dividend to the shareholders. For each organisation, the cost of capital changes quite widely. Some of the industries are more risky than the others and the investors will accept lesser returns from the organisation. For example investors will accept lower returns form a big established food group than a fledgling software company. This is because, the food organisation can generate stable returns and it is quite likely that the software company will stumble. The EVA shows the difference between the profit an organisation makes and the cost of the capital. If the cost of the capital is not covered along with a reasonable margin then the logical conclusion is that it might have been better if the investor's money might have been placed else where or if the new management team were brought in to make good use of the capital.
If the organisation is consistently developing the EVA every year then the MVA begins to rise. If the EVA is negative then the MVA will begin to fail. MVA is a good guide to where the organisation has come from but the EVA is better guide to where it will go. Of course the shareholder value will relate to the people who will effectively own the organisation.
The growth in the economic profit is considered as the main driver for creating the shareholder value. Some of the firms regard the free cash flow as the driver and also this is similar to the economic profit. The shareholder value measurement should allow the firm to drill down and also to translate the measurement to individual business units. For example, if the board decides that it wants to increase the economic profit by 20 per cent then they can pass the figure (the percentage) down to individual business and also increase the economic profit in the business or divisions. The economic profit can be easily linked to the incentive and the remuneration plan. Apart from customers the organisations will typically have other stakeholders whose attitudes and perceptions are important and will have to be managed. These include, for example, the organised labour, the regulators, and the business partners. The pertinent metrics typically depend on the type of the stakeholder and the ways in which the attitudes of the stakeholders are typically expressed or will impact the interests of the organisations. Often the metrics for the shareholder value will consist of the metrics required to recognise. It characterises the importance of the concerned stakeholder group and the metrics will indicate the anticipated reaction of the groups.