Какие бы системы управления ни использовались в вашей компании, следует всегда помнить, что для их успешного функционирования требуется единый механизм работы, слаженность и взаимодействие. Только в этом случае компания будет двигаться по пути своей стратегии, а управление будет продуманным, сбалансированным и успешным.
Источник: Андрей Гершун, управляющий партнер,
Мария Фурсеева, копирайтер, Маг Консалтинг (отрывок), www.intalev.ru
Lesson 12
Delivering Superior Shareholder Value
Measuring Value Creation
A Case Study in Delivering Shareholder Value – BP
Источник: Андрей Гершун, управляющий партнер,
Мария Фурсеева, копирайтер, Маг Консалтинг (отрывок), www.intalev.ru
Lesson 12
Management Innovations
Read and translate the text and learn terms from the Essential Vocabulary.
Delivering Superior Shareholder Value
Business Rationale of Value-Based Management
The creation and delivery of shareholder value has become a business mantra espoused by almost every-self respecting CEO. In their annual reports and published results few of them fail to mention their focus on «delivering shareholder value». However, many organizations fail to translate the aim into reality. Some manage to develop a strategy for creating value. Few actually deliver.
In the increasingly e-connected economy, investors move their money quickly around the world in the quest for the optimum shareholder returns. As a result, today’s business leaders must be able to understand how to create, measure, manage and deliver shareholder value. Messages about value in annual reports are not enough on their own.
Finance experts argue that companies need to earn a minimum level of return on all the capital they employ within their organizations. This minimum level of return required by the providers of capital is known as the «cost of capital». This means that after paying the providers of debt capital, there must still be enough left in order to compensate the equity shareholders for the risks they take.
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 creation and delivery of shareholder value has become a business mantra espoused by almost every-self respecting CEO. In their annual reports and published results few of them fail to mention their focus on «delivering shareholder value». However, many organizations fail to translate the aim into reality. Some manage to develop a strategy for creating value. Few actually deliver.
In the increasingly e-connected economy, investors move their money quickly around the world in the quest for the optimum shareholder returns. As a result, today’s business leaders must be able to understand how to create, measure, manage and deliver shareholder value. Messages about value in annual reports are not enough on their own.
Finance experts argue that companies need to earn a minimum level of return on all the capital they employ within their organizations. This minimum level of return required by the providers of capital is known as the «cost of capital». This means that after paying the providers of debt capital, there must still be enough left in order to compensate the equity shareholders for the risks they take.
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.
Measuring Value Creation
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. If, however, the NPV is negative the company’s value should theoretically decrease.
In reality there are many complications to this simple scenario. Companies represent a composite portfolio of numerous investment projects that have been made at different points of time and they do not convey all the information investors need to adjust values accordingly. Complex investment project scenarios can be extremely difficult to analyze and there are many arguments about the correct discount rates to use.
In spite of the difficulties, and although investors cannot always delve into the results of individual projects, it is possible for them to study the accounts of companies and to infer from them whether value has been added or destroyed. Investors can also extend this approach further by analyzing the forecast for companies to determine whether they are likely to add value in the future. This can help with their investment decisions and will, in turn, affect share prices.
Strictly speaking, companies wishing to deliver and maximize shareholder value creation need to focus on two things:
– Maximizing the stream of future cash flows;
– Minimizing the interest charged against that stream by reducing the «cost of capital».
Some would argue that influencing the cost of capital charge significantly is almost impossible and that the sole focus therefore should be on cash flow maximization. At its most basic level, then, a successful VBM approach means achieving a positive stream of future cash flows to give shareholders a return on capital in excess of its cost.
There are many ways of measuring this value but two are the most well known. The first is total shareholder returnand the second is economic profit.
From an investor’s perspective, when measuring the value that has been created the most important measure to use is total shareholder return. It is the sum of two components, which represent the benefits to the shareholder from owning the share:
– The percentage share price appreciation over the period being measured;
– The dividend yield during the period, expressed as a percentage of the share price.
Internally, companies that adopted VBM often use the second most popular measure of value. This is known as «economic profit». It measures the return earned by the company in a period after deducting a charge for the cost of capital employed within the business. Economic profit is often considered as the internal VBM measure that acts as a proxy for the shareholder value measured externally by the total shareholder return.
– 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. If, however, the NPV is negative the company’s value should theoretically decrease.
In reality there are many complications to this simple scenario. Companies represent a composite portfolio of numerous investment projects that have been made at different points of time and they do not convey all the information investors need to adjust values accordingly. Complex investment project scenarios can be extremely difficult to analyze and there are many arguments about the correct discount rates to use.
In spite of the difficulties, and although investors cannot always delve into the results of individual projects, it is possible for them to study the accounts of companies and to infer from them whether value has been added or destroyed. Investors can also extend this approach further by analyzing the forecast for companies to determine whether they are likely to add value in the future. This can help with their investment decisions and will, in turn, affect share prices.
Strictly speaking, companies wishing to deliver and maximize shareholder value creation need to focus on two things:
– Maximizing the stream of future cash flows;
– Minimizing the interest charged against that stream by reducing the «cost of capital».
Some would argue that influencing the cost of capital charge significantly is almost impossible and that the sole focus therefore should be on cash flow maximization. At its most basic level, then, a successful VBM approach means achieving a positive stream of future cash flows to give shareholders a return on capital in excess of its cost.
There are many ways of measuring this value but two are the most well known. The first is total shareholder returnand the second is economic profit.
From an investor’s perspective, when measuring the value that has been created the most important measure to use is total shareholder return. It is the sum of two components, which represent the benefits to the shareholder from owning the share:
– The percentage share price appreciation over the period being measured;
– The dividend yield during the period, expressed as a percentage of the share price.
Internally, companies that adopted VBM often use the second most popular measure of value. This is known as «economic profit». It measures the return earned by the company in a period after deducting a charge for the cost of capital employed within the business. Economic profit is often considered as the internal VBM measure that acts as a proxy for the shareholder value measured externally by the total shareholder return.
A Case Study in Delivering Shareholder Value – BP
BP is one of the few companies that regularly receives awards for its delivery of shareholder value. Peter Hall, the Director of Investor Relations at BP, highlights a number of key factors that keep BP near the top of the shareholder value league tables:
– The concept of shareholder value is very important within the business culture. The group actively attempts to manage and integrate the shareholder value perceived externally within the stock markets with the value created internally by the managers of the business. There is a very close link between the investor relations team and the Group CEO and CFO, who continually take a strong interest in the company’s share price. The group’s investor relations department is eight strong and has dedicated experts both in London and New York.
– The company has adopted total shareholder return as its main way of measuring shareholder value. Absolute growth in TSR is not sufficient. BP must also improve relatively against its peer group. BP has also used TSR in a sophisticated way by:
Calculating total shareholder return over a three-year period to smooth out short-term fluctuations in the stock markets;
Using a comparative peer group of companies (against whom they measure their relative TSR performance). This group includes the major six key players within the oil industry – ExxonMobil, Shell, ChevronTexaco, TOTAL, ENI and Repsol YPF.
– TSR has been adopted internally as a way of driving business performance. This has been achieved through the use of two additional performance measures, earnings growth coupled with return on capital employed. By setting business unit targets based on both of these measures, managers need to deliver growth in earnings and an increasingly effective utilization of the assets within their business. Success with these parameters should translate into improved TSR.
– The organizational structure is deliberately flat and is geared towards effective management and delivery against these key targets. There are approximately 150 business units in BP, each on average with around $0.5 billion in capital employed. This is small enough to enable the CEO, if he wants to communicate an important message, to bring together all the managers of the business units into one room if necessary.
– The concept of shareholder value is very important within the business culture. The group actively attempts to manage and integrate the shareholder value perceived externally within the stock markets with the value created internally by the managers of the business. There is a very close link between the investor relations team and the Group CEO and CFO, who continually take a strong interest in the company’s share price. The group’s investor relations department is eight strong and has dedicated experts both in London and New York.
– The company has adopted total shareholder return as its main way of measuring shareholder value. Absolute growth in TSR is not sufficient. BP must also improve relatively against its peer group. BP has also used TSR in a sophisticated way by:
Calculating total shareholder return over a three-year period to smooth out short-term fluctuations in the stock markets;
Using a comparative peer group of companies (against whom they measure their relative TSR performance). This group includes the major six key players within the oil industry – ExxonMobil, Shell, ChevronTexaco, TOTAL, ENI and Repsol YPF.
– TSR has been adopted internally as a way of driving business performance. This has been achieved through the use of two additional performance measures, earnings growth coupled with return on capital employed. By setting business unit targets based on both of these measures, managers need to deliver growth in earnings and an increasingly effective utilization of the assets within their business. Success with these parameters should translate into improved TSR.
– The organizational structure is deliberately flat and is geared towards effective management and delivery against these key targets. There are approximately 150 business units in BP, each on average with around $0.5 billion in capital employed. This is small enough to enable the CEO, if he wants to communicate an important message, to bring together all the managers of the business units into one room if necessary.
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