Ten Ways to Create Value for Shareholders

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In the article Ten Ways to Create Shareholder Value, Alfred Rappaport highlights the tendency of most companies focusing on short-term earnings at the expense of future value (Rappaport, 2006). For this reason, the company fails to attain its projected long-term growth. Therefore, the company pursues undertakings that are below the interest rate of the cost of capital. Moreover, companies report good earnings while they have made decisions that hinder value creation. In most instances, companies cut research and development, hiring, advertising, and maintenance budgets to entice shareholders with high earnings. In a move to back up these facts, he provides data from a 2006 survey that reveals that two-thirds of companies reveal how they distribute earnings to Wall Street and this trend is visible.

The facts presented by Rappaport validate his argument of companies desisting from managing earnings. It is important to note that strategies adopted by the company have an impact on value creation. Besides, the company should make decisions that optimize shareholder value while at the same time addressing the competitive dynamics (Lazonick & O'sullivan, 2000). The company executive should undertake projects such as acquisitions as they increase the expected value despite the fact that they may translate to lower short-term earnings.  

Financial Persuasion

The financial persuasion provided by Alfred Rappaport surrounds issues related to earnings, cash flows, and low turnovers. It is important to note that Rappaport explains the significance of these elements when it comes to value creation and how companies can shape their decisions around them (Rappaport, 2006). Moreover, the author makes it clear that offering the shareholders lower earnings to implement long-term projects will have a positive impact on short-term performance while avoiding risks that may arise. On the other hand, the three elements of financial persuasion require firms to consider asset maintenance. Hence, Rappaport considers cashflow generation plays an important role in improving the profitability of a company. 

It is important to note that Rappaport provides adequate data when supporting his arguments. In particular, he quotes earning benchmarks and sample surveys that come in handy in his financial persuasion. However, some financial information is omitted as he fails to give examples of companies that have exemplified the ten principles of creating shareholder value. Besides, focusing on shareholder value is considered to propagate short-termism and diversion of funds that would finance research and development among other projects such as acquisitions (Kengelbach, Roos & Kelenburg, 2014). On the other hand, Rappaport does not feature elements such as customer loyalty and their significance towards generating cash flows to companies.

Implications on Organizations

According to Rappaport, value creation plays a significant role in the expansion of organizations (Rappaport, 2006). For this reason, organizations should opt for long-term value optimization. Moreover, the value creation will determine the financial situation of a company. The primary reason for this is because value creation reflects long-term market review vital in attaining the set financial outcomes of the organization. On the other hand, the company should base its performance measurement on the operating margins and specifically look at operating units, capital expenditures, and sales growth. Hence, the company executives will be in a better position to make strategic decisions and take relevant actions that will create value for the shareholders.

When it comes to interested parties and constituents, Alfred Rappaport focuses on potential investors, senior executives, and shareholders. In particular, organizations need to align their interests with those of its shareholders and the executive. For this reason, the business operations being consistent with the needs of the shareholders and the executives will translate to a proper balance of benefits, high rates of return, and appropriate ownership stakes. Hence, there will be the generation of genuine value for the company’s constituents and interested parties if there is genuine corporate performance.

Observation and Analysis of Amazon’s Financial Functions

Alfred Rappaport highlights on value-creation for the shareholders of a company. It is important to note that the article explains some of the financial elements that are significant in improving profitability and at the same time promoting the management of earnings (Rappaport, 2006). On the other hand, the article shed light on the vulnerability of the shareholders of a company. In particular, the most vulnerable shareholders are those that own shares in companies with capital constraints. Therefore, the high vulnerability translates into decreased stock prices and further lower revenues. Concerning financial volatility, companies need to assess the extent to which they are able to hire and retain skilled workers.

The insights offered by Rappaport are exemplified in Amazon's financial function. Moreover, the finance function assists the organization in evaluating its output level by focusing on the payment level, venturing into risk management markets, and the ability to acquire information on investment opportunities. On the other hand, Amazon has shown how companies should facilitate their financial assets. It is important to note that the financial management of an organization shows the level of corporate governance by the company executives. For this reason, the corporate governance generates value creation for the shareholders and therefore making the company successful in the long-term as is the case with Amazon.   

Reference

Kengelbach, J., Roos, A., & Kelenburg, G. (2014). Creating Shareholder Value with Divestitures. Boston Consulting Group Perspectives.

Lazonick, W., & O'sullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and society, 29(1), 13-35.

Rappaport, A. (2006). Ten ways to create shareholder value. Harvard Business Review, 84(9), 66-77.

January 19, 2024
Category:

Business Economics

Subcategory:

Corporations Finance

Subject area:

Company

Number of pages

4

Number of words

891

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