SHAREHOLDER VALUE

Shareholder Value

Shareholder Value

Shareholder value is defined as present value of free cash flow from now to infinity, discounted at the rate that reflects risks of these cash flows. Therefore, maximization of shareholder value is not same as maximizing short-term profits, earnings per share or manipulation of stock prices through accounting fraud. Enron debacle, in which all shareholders lost their money, has nothing to do with excessive emphasis on shareholder value. Another misconception is that because anyone who evaluates decisions based on consequences of shareholder value, is not concerned with other stakeholders.

In the spreadsheet discounted cash flow, shareholder value is calculated after deducting income and labor costs, executive compensation, interest and taxes. This residual cash flow incorporates interests of all stakeholders, not just shareholders. What we do are “balance” interests of stakeholders to justify any decision by theory of maximization of stakeholders. For example, maximization of shareholder value could mean that I have to pay workers' wages above competition at expense of shareholders. Problem is that if you do this in the competitive market in long term, you will be driven into bankruptcy, as recently illustrated by collapse of General Motors. Of course, in short term the company can gain abnormal, but this will attract competitors, so that in long run, shareholders will also earn the competitive rate of return.

While economists usually justify maximization of shareholder value based on economic efficiency arguments, Vermaelen want to turn this ethic. We propose the new definition of ethical behavior in business is less complicated for very personal respect for implicit contracts. Once we accept this definition, maximizing shareholder value may well be an ethical responsibility.

Vermaelen takes view that the company should be considered as the nexus of contracts between various stakeholders. All contracts have explicit and implicit characteristics. For example, debt contract has the number of explicit terms such as maturity, interest rate, seniority, Conventions, etc. However, shareholders have an implied contract greatly. In addition to voting rights, which are relatively negligible for small shareholders, shareholders do not have explicit rights. Shareholders are not entitled to dividends or can not get their money. As the company shareholder requirements, survival of the company with the wide dispersion of ownership depends on survival of this implicit contract.

In the capitalist economy is reasonable to assume that shareholders have an implied contract management to maximize their interests, "says Vermaelen." Therefore, I believe that respect for such implicit contracts is an ethical responsibility. Therefore, policies that are deliberately aimed at destroying shareholder value are unethical. Unless, of course, company makes clear in advance that you will pursue the different objective. For example, the company raises equity and states to begin the policy of corporate social responsibility to distribute five percent of its profits to poor people behave ethically because investors can incorporate benefits lower issue price of actions. However, implementation of such policies when they are not announced in advance, in my opinion, unethical.

Shareholder value is the business buzz word, which means that ultimate measure of success of the ...