Creating Sharholder Value

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9780684844107: Creating Sharholder Value

The ultimate test of corporate strategy, the only reliable measure, is whether it creates economic value for shareholders. Now, in this substantially revised and updated edition of his 1986 business classic, "Creating Shareholder Value", Alfred Rappaport provides managers and investors with the practical tools needed to generate superior returns. After a decade of downsizings frequently blamed on shareholder value decision making, this book presents a new and indepth assessment of the rationale for shareholder value. Further, Rappaport presents provocative new insights on shareholder value applications to: (1) business planning, (2) performance evaluation, (3) executive compensation, (4) mergers and acquisitions, (5) interpreting stock market signals, and (6) organizational implementation. Readers will be particularly interested in Rappaport's answers to three management performance evaluation questions: (1) What is the most appropriate measure of performance? (2) What is the most appropriate target level of performance? and (3) How should rewards be linked to performance? The recent acquisition of Duracell International by Gillette is analyzed in detail, enabling the reader to understand the critical information needed when assessing the risks and rewards of a merger from both sides of the negotiating table. The shareholder value approach presented here has been widely embraced by publicly traded as well as privately held companies worldwide. Brilliant and incisive, this is the one book that should be required reading for managers and investors who want to stay on the cutting edge of success in a highly competitive global economy.

Les informations fournies dans la section « Synopsis » peuvent faire référence à une autre édition de ce titre.

Extrait :

Chapter 1

SHAREHOLDER VALUE AND CORPORATE PURPOSE

The idea that management's primary responsibility is to increase value has gained widespread acceptance in the United States since the publication of Creating Shareholder Value in 1986. With the globalization of competition and capital markets and a tidal wave of privatizations, shareholder value rapidly is capturing the attention of executives in the United Kingdom, continental Europe, Australia, and even Japan. Over the next ten years shareholder value will more than likely become the global standard for measuring business performance.

In the early 1980s there were very few companies with an unambiguous commitment to shareholder value. While many companies used piecemeal applications of the shareholder value approach, such as discounted cash-flow analysis for capital budgeting decisions and for merger-and-acquisition pricing, management thinking largely was governed by a short-term earnings orientation. The takeover movement of the latter half of the 1980s provided a powerful incentive for managers to focus on creating value. Many companies, particularly those in mature industries such as oil, allocated their very substantial excess cash flow toward uneconomic reinvestment or ill-advised diversification. Other companies failed to seek the highest valued use for their assets. For example, retailing establishments, particularly large department stores sitting on valuable downtown real estate, missed the opportunity to sell the real estate and redeploy the cash to value-creating growth or, in the absence of profitable investment opportunities, distribute the cash to shareholders. In each of these cases the stock market predictably penalized the companies' shares. This led to the infamous "value gap," i.e., the difference between the value of the company if it were operated to maximize shareholder value and its current market value. A positive "value gap" was an invitation to well-financed corporate raiders to bid for the company and replace incumbent management. The only compelling takeover defense is to close the "value gap" by delivering superior shareholder value. Whatever one thinks of raiders and their tactics, the threats of takeovers did prompt CEOs to give long-overdue focus to delivering value for shareholders.

The excesses of the late-1980s takeover movement -- payments of unwarranted acquisition premiums financed by high leverage -- led to the demise of "financial" acquisitions. Entering the 1990s CEOs of many public companies were relieved to see Wall Street raiders move backstage. But there was to be no return to business as usual. Over the past few years institutional investors have substantially increased their efforts to gain better returns for the beneficiaries of the funds they manage. Their primary approach has been to shine the spotlight on underperforming companies and promote changes in either corporate strategy or in management itself. For example, the California Public Employees' Retirement System (CalPERS) screens annually for the ten most seriously underperforming stocks in its portfolio. The Council of Institutional Investors, a trade organization for public pension funds, publishes a "bottom 20" list comprised of companies in the Standard & Poor's 500 who most underperformed their industry in total shareholder returns, i.e., dividends plus stock price change. In 1992 Robert Monks and Nell Minow founded LENS, a fund exclusively devoted to investing in "companies with strong underlying values, but whose performance lags due to lack of focus by the management or the board." After four years of constructive involvement with its portfolio companies, $1 invested in 1992 compounded to $2.28 versus $1.69 for the S&P 500. Active institutional investors have helped displace CEOs at such major companies as American Express, Eastman Kodak, General Motors, IBM, K-Mart, Sears, and Westinghouse.

Maximizing shareholder value is now embraced as the "politically correct" stance by corporate board members and top management in the United States. As is the case with other good ideas, shareholder value has moved from being ignored to being rejected to becoming self-evident. It is invariably invoked in annual reports, press releases, meetings with financial analysts, and management speeches. However, the critical role of the shareholder value approach in allocating resources in a market-based economy is far from universally accepted. Years of restructuring and employee layoffs frequently attributed to shareholder value considerations coupled with politicians who charge top management with self-interest and a shortsighted focus on the current stock price have promoted frustration and uncertainty. In other parts of the world, such as the European continent, there is increasing political tension between the shareholder value business practices required in a competitive global market and the long-standing tradition of social welfare. In light of these developments, a reassessment of the fundamental rationale for the shareholder value approach is warranted.

MANAGEMENT VERSUS SHAREHOLDER OBJECTIVES

It is important to recognize that the objectives of management may in some situations differ from those of the company's shareholders. Managers, like other people, act in their self-interest. The theory of a market economy is, after all, based on individuals promoting their self-interests via market transactions to bring about an efficient allocation of resources. In a world in which principals (e.g., stockholders) have imperfect control over their agents (e.g., managers), these agents may not always engage in transactions solely in the best interests of the principals. Agents have their own objectives and it may sometimes pay them to sacrifice the principals' interests. There are, however, a number of factors that induce management to act in the best interests of shareholders. These factors derive from the fundamental premise that the greater the expected unfavorable consequences to the manager who decreases the wealth of shareholders, the less likely it is that the manager will, in fact, act against the interests of shareholders.

Consistent with the above premise, at least four major factors will induce management to adopt a shareholder orientation: (1) a relatively large ownership position, (2) compensation tied to shareholder return performance, (3) threat of takeover by another organization, and (4) competitive labor markets for corporate executives.

Economic rationality dictates that stock ownership by management motivates executives to identify more closely with the shareholders' economic interests. Indeed, we would expect that the greater the proportion of personal wealth invested in company stock or tied to stock options, the greater would be management's shareholder orientation. While the top executives in many companies often have relatively large percentages of their wealth invested in company stock, this is much less often the case for divisional and business unit managers. And it is at the divisional and business unit levels that most resource allocation decisions are made in decentralized organizations.

Even when corporate executives own shares in their company, their viewpoint on the acceptance of risk may differ from that of shareholders. It is reasonable to expect that many corporate executives have a lower tolerance for risk. If the company invests in a risky project, stockholders can always balance this risk against other risks in their presumably diversified portfolios. The manager, however, can balance a project failure only against the other activities of the division or the company. Thus, managers are hurt by the failure more than shareholders.

The second factor likely to influence management to adopt a shareholder orientation is compensation tied to shareholder return performance. The most direct means of linking top management's interests with those of shareholders is to base compensation, and particularly the incentive portion, on market returns realized by shareholders. Exclusive reliance on shareholder returns, however, has its own limitations. First, movements in a company's stock price may well be greatly influenced by factors beyond management control such as the overall state of the economy and stock market. Second, shareholder returns may be materially influenced by what management believes to be unduly optimistic or pessimistic market expectations at the beginning or end of the performance measurement period. And third, divisional and business unit performance cannot be directly linked to stock price.

The third factor affecting management behavior is the threat of takeover by another company. Tender offers have become a commonly employed means of transferring corporate control. Moreover the size of the targets continues to become larger. The threat of takeover is an essential means of constraining corporate managers who might choose to pursue personal goals at the expense of shareholders. Any significant exploitation of shareholders should be reflected in a lower stock price. This lower price, relative to what it might be with more efficient management, offers an attractive takeover opportunity for another company, which in many cases will replace incumbent management. An active market for corporate control places limits on the divergence of interests between management and shareholders.

The fourth and final factor influencing management's shareholder orientation is the labor market for corporate executives. Managerial labor markets are an essential mechanism for motivating management to function in the best interests of shareholders. Managers compete for positions both within and outside of the firm. The increasing number of executive recruiting firms and the length of the "Who's News" column in the Wall Street Journal are evidence that the managerial labor market is very active. What is less obvious is how managers are evaluated in this market. Within the firm, performance evaluation and incentive schemes are the basic mechanisms for monitoring managerial performance. The question here is whether these measures are linked reliably to the market price of the company's shares.

How managers communicate their value to the labor market outside of their individual firms is less apparent. While the performance of top-level corporate officers can be gleaned from annual reports and other publicly available corporate communications, this is not generally the case for divisional managers. For corporate level executives, the question is whether performance for shareholders is the dominant criterion in assessing their value in the executive labor market. The question in the case of division managers is, first, how does the labor market monitor and gain insights about their performance and second, what is the basis for valuing their services.

SHAREHOLDERS AND STAKEHOLDERS

Environmentalists, social activists, and consumer advocates such as Ralph Nader have argued since the 1960s that corporations should be "socially responsible" and serve the broader public interest as well as shareholder interests. In the 1990s corporate governance discussions are replete with references to "balancing the interests of all stakeholders." While corporate social responsibility and stakeholder advocates sometimes embrace different issues, each calls for the corporation to have a purpose beyond maximizing returns to shareholders.

In a market-based economy that recognizes the rights of private property, the only social responsibility of business is to create shareholder value and to do so legally and with integrity. Critical social issues in education, health care, drug abuse, and the environment pose enormous social challenges. Corporate management, however, has neither the political legitimacy nor the expertise to decide what is in the social interest. Our form of government calls for elected legislators and the judicial system to be the mechanisms for collective choice. Ironically, costs that social responsibility advocates would impose on corporations often are costs that voters through the political process would be unwilling to bear. Such imposed costs invariably will be passed on to consumers by way of higher prices, to employees as lower wages, or to shareholders as lower returns. There still is no free lunch.

Fortunately, there are powerful market incentives that lead value-maximizing managements to make decisions with socially desirable outcomes. Workplace safety serves as an excellent example. The passage in 1970 of the Occupational Health and Safety Act apparently did little to reduce job-related accidental deaths, since they declined at about the same rate before and after its passage. The steady improvement in workplace safety over the years is more reasonably explained by the employer's strong economic incentives to avoid accidents. First, there is a significant wage and benefits premium that employees demand for the higher risk associated with a dangerous workplace. When an accident occurs there are additional losses due to lost worker time and increased turnover arising from safety fears of coworkers. Second, there are workers' compensation insurance premiums paid by the employer, which are affected by accident rates. There are significant savings to be realized for relatively small reductions in accident rates. Managements governed by shareholder interests would invest in technology, training, or reengineered workplaces that reduce safety costs.

Because of its ambiguity and lack of enforceability, the corporate social responsibility model gets little support from policymakers and corporate governance activists today. Primarily as a response to significant employee layoffs, "balancing the interests of stakeholders" has commanded increasing attention in the 1990s. This is not a new idea. Chief executives of some of our largest companies have contended that shareholder interests should not be their primary obligation. Hicks B. Waldron, the former chairman of Avon Products, for example, states: "We have 40,000 employees and 1.3 million representatives around the world. We have a number of suppliers, institutions, customers, and communities. None of them have the democratic freedom as shareholders do to buy or sell their shares. They have much deeper and much more important stakes in our company than our shareholders." Critics charge that balancing stakeholder interests is simply rhetoric by entrenched managers who wish to deflect attention away from their poor performance for shareholders.

It is precisely this casualness toward shareholder interests that precipitated the 1980s takeovers with all their unpleasant and largely avoidable consequences to many employees and communities. The takeover movement demonstrated little tolerance for managements not attentive to shareholder value. Takeovers as well as restructurings, which were management's response to the threat of takeover, unlocked billions of dollars of value for shareholders. It wo...

Revue de presse :

Alan Shapiro Ivadelle and Theodore Johnson Professor of Banking and Finance, Graduate School of Business Administration, University of Southern California Al Rappaport lives up to his reputation as the father of shareholder value. This book is an invaluable resource for anyone committed to creating shareholder value or teaching about it. Creating Shareholder Value presents not just the basic principles and theoretical underpinnings of its subject matter but also their application through numerous well-chosen and up-to-date real-world examples.

Michael J. Mauboussin Managing Director, Equity Research, Credit Suisse First Boston Corporation Herein lie the power tools of any investor's toolbox. This significant update to the seminal Creating Shareholder Value offers investors and corporate managers a theoretically sound and practically usable guide for decision making. Business people who have been jostled by the latest management fads and buzzwords will find refuge in Rappaport's well-conceived and effective framework.

Harry M. Jansen Kraemer, Jr. President, Baxter International, Inc Dr. Rappaport does a phenomenal job of bridging the gap between shareholder value theory and practice. I highly recommend Creating Shareholder Value for CEOs, CFOs, business school students and anyone who wants to truly understand as well as create shareholder value.

Stephen F. Bollenbach President and CEO, Hilton Hotels Corporation Updates all of us on the front lines with the latest thinking about creating shareholder value—from the social aspects to the very specific. I recommend this book to any person seriously concerned about the function of a corporation in a market economy.

Martin L. Leibowitz, Vice Chairman and Chief Investment Officer, TIAA-CREF Rappaport's work shines a bright light on how to systematically apply fiancial theory to the pratical problems of corporate valuation. The distinction Rappaport makes between shareholder return and corporate return is particularly critical in today's markets. Every serious ananlyst should have a firm understanding of his writings.

Charles W. McCall President and CEO, HBO & Company I've had the pleasure of following Al Rappaport's work for over 20 years and I feel this is his best work ever. The insights on acquisitions and the work on performance measurements are very important for fast-growing companies. Al's principles have helped us grow from a market value of less than $100 million to over $7 billion in the past six years.

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Description du livre Simon Schuster Ltd, United Kingdom, 1998. Hardback. État : New. Updated ed.. 236 x 155 mm. Language: English . Brand New Book. In this substantially revised and updated edition of his 1986 business classic, Creating Shareholder Value, Alfred Rappaport provides managers and investors with the practical tools needed to generate superior returns. The ultimate test of corporate strategy, the only reliable measure, is whether it creates economic value for shareholders. After a decade of downsizings frequently blamed on shareholder value decision making, this book presents a new and indepth assessment of the rationale for shareholder value. Further, Rappaport presents provocative new insights on shareholder value applications to: (1) business planning, (2) performance evaluation, (3) executive compensation, (4) mergers and acquisitions, (5) interpreting stock market signals, and (6) organizational implementation. Readers will be particularly interested in Rappaport s answers to three management performance evaluation questions: (1) What is the most appropriate measure of performance? (2) What is the most appropriate target level of performance? and (3) How should rewards be linked to performance? The recent acquisition of Duracell International by Gillette is analyzed in detail, enabling the reader to understand the critical information needed when assessing the risks and rewards of a merger from both sides of the negotiating table. The shareholder value approach presented here has been widely embraced by publicly traded as well as privately held companies worldwide. Brilliant and incisive, this is the one book that should be required reading for managers and investors who want to stay on the cutting edge of success in a highly competitive global economy. N° de réf. du libraire BZV9780684844107

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Description du livre Simon Schuster Ltd, United Kingdom, 1998. Hardback. État : New. Updated ed.. 236 x 155 mm. Language: English . Brand New Book. In this substantially revised and updated edition of his 1986 business classic, Creating Shareholder Value, Alfred Rappaport provides managers and investors with the practical tools needed to generate superior returns. The ultimate test of corporate strategy, the only reliable measure, is whether it creates economic value for shareholders. After a decade of downsizings frequently blamed on shareholder value decision making, this book presents a new and indepth assessment of the rationale for shareholder value. Further, Rappaport presents provocative new insights on shareholder value applications to: (1) business planning, (2) performance evaluation, (3) executive compensation, (4) mergers and acquisitions, (5) interpreting stock market signals, and (6) organizational implementation. Readers will be particularly interested in Rappaport s answers to three management performance evaluation questions: (1) What is the most appropriate measure of performance? (2) What is the most appropriate target level of performance? and (3) How should rewards be linked to performance? The recent acquisition of Duracell International by Gillette is analyzed in detail, enabling the reader to understand the critical information needed when assessing the risks and rewards of a merger from both sides of the negotiating table. The shareholder value approach presented here has been widely embraced by publicly traded as well as privately held companies worldwide. Brilliant and incisive, this is the one book that should be required reading for managers and investors who want to stay on the cutting edge of success in a highly competitive global economy. N° de réf. du libraire AAS9780684844107

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