Shareholder Value & Investor Relations – Capital Market & Companies Often Talk at Cross Purposes
Shareholder value – a frequently discussed approach. What are the goals of the shareholder value approach? To put it simply: the consideration of the interests of the shareholders. The aim is to increase the value of equity. So a corporate policy based on shareholder value will try to increase the price of the shares.
Unfortunately, the price of shares can only be increased directly to a limited extent. The price of a share is subject to many factors. For example, the economy. Or even emotional factors. For these reasons one falls back on a mathematical value. This can be, for example, the discounted future free cash flows minus the market value of the debt capital.
Known Methods for Determining Shareholder Value are:
- Discounted Cashflow according to Rappaport
- Discounted Cashflow according to Copeland/Koller/Murrin
- Cashflow-Return-On-Investment (CFROI) according to the Boston-Consulting-Group
- Economic-Value-Added (EVA) according to Stern/Stewart
The discounted cash flow (DCF) approaches and economic value added (EVA) are two very different approaches. In the literature and on the capital market (analysts & portfolio managers), the discounted cash flow models dominate – a method based on expected future cash flows. However, companies often use EVA as the basis for managing their business as part of the shareholder value concept – an approach that uses the current residual profit as a basis.
The Capital Market Talks about Apples, The Companies about Pears.
Here it becomes clear: Portfolio managers & analysts ask for expected future successes within the framework of the DCF procedure, companies answer with the current residual profit within the framework of the EVA model. Portfolio managers & analysts want to take risk into account in the DCF process, but companies do not take risk into account in the EVA approach. Or to put it another way: You talk past each other.
What Do Investors Want?
To put it quite simply: information for estimating future developments. What do companies deliver? Annual reports with figures on the past. Here, too, investors and companies often talk at cross purposes. What exactly can such information look like? Information that helps analysts and portfolio managers to understand the company’s strategy and its value drivers is in demand.
Corporate Strategy as One of the Central Interests of Investors & Analysts
What is the company’s strategy? How should this strategy be achieved? Why does the company think this strategy is the right one? What do the performance management processes look like? Which indicators are used to measure the implementation of the strategy? What is important here is that the strategy must be broken down to measurable values.
Value Drivers – Which Factors Make the Company Big?
What exactly will make the company a major global player in the future in which investors want to invest? In order to decide this, investors need answers to the most important value drivers of the company. What are the value drivers within the market in which the company operates? How is the company positioned in relation to its competitors? What are future anticipated trends in the market? How does management intend to maintain or expand its current position in the market?
And the most important transfer: How will these value drivers be reflected in future cash flows? And how will the value of the company be increased through the value drivers and the resulting future cash flows?