Английский язык. Практический курс для решения бизнес-задач - стр. 70

The returns to shareholders can take the form of dividends and growth in the value of their shares. In the long run, unless companies are able to deliver returns that exceed the cost of capital, the shareholders will grow dissatisfied, disposing of their investments and forcing down the share price.

Falling share prices erode the value of equity investments and lead to disgruntled investors. Disgruntled investors, if upset for long enough, may seek to replace existing managers with those who can produce results of the size needed to maintain and increase share price. There is strong evidence of increasing shareholder activities of this sort. Understandably, companies, and their executive management teams, seek tools to help them measure and deliver value to shareholders.

Value-based management is such a management technique. It is designed to help companies create superior shareholder value through aligning the focus of management decision-making with the interests of shareholders. Major companies like Barclays Bank and Sainsbury have started to focus on VBM to help them manage and, indeed, transform their business. Thus, Lloyds Bank first came to adopt a VBM approach in the mid-1980s. As a result, its shares showed remarkably impressive performance in relation to its peers, such as Barclays Bank, and the Datastream Banks Index over a 15-year period. Given the relative «underperformance» of Barclays over time, it is no wonder that Barclays announced the introduction of VBM in 2000 with the express aim of helping it to become a top-tier performer.

Shareholder value became a business mantra in the 1990s and it is likely to become more widely espoused in the new millennium. Why? The focus on value creation gives purpose for energizing high performance in every aspect of the business.

The old saying «what gets measured gets done» is certainly true in the world of shareholder value. When businesses manage for shareholder value they tend to adopt a common language of value-based metrics. These in turn can be linked to other financial and non-financial measures and targets which help to drive success and, importantly, deliver superior returns for investors when embedded successfully in the business.

The metrics that measure «value» or «value creation» were originally based on DCF techniques and these are most commonly applied to individual project evaluations. The first step in measuring the value created from any investment project is to calculate the net present value (NPV). The NPV represents:

– The sum of the «present values» of future cash flows resulting from an investment that is discounted at a given rate of interest, the «cost of capital». This gives a sum for the future receipts from the investment expressed in today’s monetary values.

– Less the cost of the investment. This determines whether, again in today’s money, there is a surplus or deficit from the investment.

The NPV that results simply represents the «present value» of the future cash flows less the original cost of the investment. If the NPV is positive then the return from the investment has exceeded the cost of capital and the value of the company should increase by the amount of value created.