MOUNT KENYA UNIVERSITY
Master of Business Administration (MBA)
By Dr. Nyamache
Finance for small Business
SELECTING STRATEGIES THAT CREATE SHAREHOLDER VALUE
Public and private companies are under a great deal of pressure to create and sustain shareholder value by increasing both returns on capital and growth rates and company’s stock price or equity value. Share holders would like to associate with a firm whose stock prices are not depressed.
Who is a Shareholder?
A share holder can be defined as the owner of one or more shares of stock in a corporation, commonly also called a "stockholder." The benefits of being a shareholder include receiving dividends for each share as determined by the Board of Directors, the right to vote (except for certain preferred shares) for members of the board of directors, to bring a derivative action (lawsuit) if the corporation is poorly managed, and to participate in the division of value of assets upon dissolution and winding up of the corporation, if there is any value. A shareholder should have his/her name registered with the corporation, but may hold a stock certificate which has been signed over to him/her. Before registration the new shareholder may not be able to cast votes represented by the shares.(Enhancing share holder value, Dr William .e. Broxterman Chairman/CEO Chemquest Group,unc). Shareholder value is a business term, which implies that the ultimate measure of a company's success is to enrich shareholders. It became popular during the 1980s, and is particularly associated with former CEO of General Electric, Jack Welch.( In March 2009), Welch openly turned his back on the concept, calling shareholder value "the dumbest idea in the world".
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 higher returns than they could earn themselves by investing in other assets having the same amount of risk. (The term in this sense was introduced by Dr Alfred Rappaport in 1986.) In (1981, Jack Welch made a speech in Hotel Pierre, New York City called) ‘Growing fast in a slow-growth economy’ (8.12.1981) 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 today’s fast-changing, often business environment, formal systems for strategic planning have become one of top management’s principal tools for evaluating and coping with uncertainty. One of the key roles of Board of directors is to approve and adopt the strategic and annual business plans, the setting of objectives and review of key risk and performance areas. Corporate board members are also showing increasing interest in ensuring that the company has adequate strategies and that these are tested against actual results. While the organizational dynamics and the sophistication of the strategic planning process vary widely among companies, the process almost invariably culminates in projected (commonly five-year) financial statements. This enables top managers and the board to review and approve strategic plans in the same terms that the company reports its performance to shareholders and the financial community. Under current practice the projected financial statements, particularly projected earnings per share performance, commonly serve as the basis for...
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