The goal of countless corporations around the world is to create value for their shareholders in the most profitable ways possible. In this article, Rappaport put together some familiar business wisdom to present ten simple principles to help company to create the most effective shareholder value.
The first principle urges companies not to manage earnings or provide earnings guidance. Companies unable to adopt this principle of shareholder value are unlikely to follow the others. Second, make strategic decisions that maximize expected value, even if near-term earnings are negatively affected as a result. Third, the same applies to acquisitions that maximize expected value. Fourth, carry only assets that maximize expected value. Fifth, return cash to shareholders when there are no credible value-creating opportunities to invest in the business.
Sixth, reward CEOs and other senior executives for delivering superior long-term returns. Seventh, reward operating unit executives for adding superior multiyear value. Eighth, reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly. Ninth, require senior executives to bear the risks of ownership just as shareholders do. Finally, provide investors with value-relevant information. This should dilute short-term earnings obsessions and decrease investor uncertainty, possibly reducing the cost of capital and increasing the share price.
A company needs to select the best method of returning value to its shareholders after considering the needs Rappaport teaches some effective pay incentives at every level of management. He emphasizes in the article that senior executives need to lay their wealth on the line just as shareholders do, and urges companies to embrace full disclosure, an antidote to short-term earnings obsession that serves to lessen investor uncertainty, which could reduce the cost of capital...