does increased cashflows maximize shareholder value

Why haven’t other companies embraced SVA? One reason is that its broad usefulness in decision making has become clear only as software and personal computers have made it more accessible. We know which divisions are worth the most to us and how much value each will create we know which strategies will create the most value at each division we know the value of our stock… In sum, we have the tools to manage our company better from a strategic and financial standpoint.” An executive at PepsiCo describes the advantages this way: “We now have a solid financial blueprint for the corporation. Other companies-like PepsiCo and Westinghouse-are also making SVA an integral part of the management process. The price of his company’s stock has climbed by 100 % in two and a half years-more than three times the rise in the market. He is “institutionalizing” it so that managers at all levels use SVA as a touchstone when making judgments about what strategy is most promising or what product line is most attractive. He doesn’t apply it here and there to investment decisions or merely pay it lip service. The CEO of the multibusiness company-let’s call him Robert Coleman-is one of the exceptions, one of a handful of executives who have taken SVA to heart. They use it to calculate breakup values or to evaluate capital investments and acquisitions, but these applications don’t come close to exploiting the full potential of the technique to guide strategy and operational improvement at both the corporate and the business-unit level. And in light of all the recent takeover activity, they know they have to keep economic value as high as possible to prove that they’re the best stewards of the company’s assets.īut while many corporate executives talk about shareholder value in their annual reports and speeches, most have not made it part of their everyday decision making. These managers are convinced that economic value is a more important determinant of a public company’s stock price or a private company’s worth than earnings per share, grow thin sales or profits, or other traditional accounting measures. They know that modern finance theory says economic value is the right yardstick for measuring business performance, since it reflects risk and the time value of money and provides a framework for balancing P&L and balance sheet trade-offs. Like this CEO, the top managers of many large corporations endorse the concept of shareholder value analysis (SVA)-the process of analyzing how business decisions affect the company’s “economic value” (net present value of expected cash flows discounted at the cost of capital). Executives would restructure and manage the corporation accordingly-from top to bottom. In his first big presentation to the board, the newly appointed CEO of a $3 billion, multibusiness company announced his intention to shift management’s focus from quarterly earnings to “shareholder value.” The management team was determined to understand exactly how much value the corporation and each of its business units were creating for shareholders and what the options were for improving performance.

Does increased cashflows maximize shareholder value