Editing Shareholder value (section)

==Value-based management==
{{See also|Valuation: Measuring and Managing the Value of Companies}}
As a management principle, value-based management (VBM), or managing for value (MFV), states that management should first and foremost consider the interests of shareholders when making management decisions.<ref name=":01" /><ref>{{Cite book|last1=Kilroy|first1=Denis|url=https://books.google.com/books?id=GjUyDwAAQBAJ&pg=PA13|title=Customer Value, Shareholder Wealth, Community Wellbeing: A Roadmap for Companies and Investors|last2=Schneider|first2=Marvin|publisher=Springer|year=2017|isbn=9783319547749|pages=12–16, 24–25|language=en}}</ref><ref>{{Cite web|url=https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/what-is-value-based-management|title=What is value-based management?|website=McKinsey|language=en|access-date=2019-05-07}}</ref><ref>{{Cite book|title=Value Imperative: Managing for Superior Shareholder Returns|last1=McTaggert|first1=James M.|last2=Kontes|first2=Peter W.|last3=Mankins|first3=Michael C|publisher=Free Press|year=1994|isbn=978-0029206706|url-access=registration|url=https://archive.org/details/valueimperativem00mcta_0}}</ref> Under this principle, senior executives should set performance targets in terms of delivering shareholder returns (stock price and dividends payments) and managing to achieve them.<ref>{{Cite book|last=Fernandez|first=Pablo|url=https://books.google.com/books?id=jIzV5TbXCikC&pg=PA265|title=Valuation Methods and Shareholder Value Creation|publisher=Elsevier|year=2002|isbn=9780080520377|page=265|language=en|quote=parameters that have been proposed for measuring a firm's "value creation" for its shareholders ... are ... economic value added ... economic profit ... market value added ... cash value added}}</ref><ref>{{Cite journal|last1=Gillis|first1=Scott|last2=McTaggart|first2=James|date=1998|title=Setting targets to maximize shareholders value|journal=Strategy & Leadership|volume=26|issue=2|pages=18–21|doi=10.1108/eb054614|issn=1087-8572}}</ref><ref>{{cite web|title=Valuation: Measuring and Managing the Value of Companies, 6th Edition|url=http://www.mckinsey.com/client_service/corporate_finance/latest_thinking/valuation|url-status=dead|archive-url=https://web.archive.org/web/20150826042616/http://www.mckinsey.com/client_service/corporate_finance/latest_thinking/valuation|archive-date=2015-08-26|access-date=2015-08-05|publisher=[[mckinsey.com]]}}</ref>

The concept of maximizing shareholder value is usually highlighted in opposition to alleged examples of CEO's and other management actions which enrich themselves at the expense of shareholders. Examples of this include acquisitions which are dilutive to shareholders, that is, they may cause the combined company to have twice the profits for example but these might have to be split amongst three times the shareholders. Although the legal premise of a publicly traded company is that the executives are obligated to maximize the company's profit,<ref>Maxwell S. Kennerly, Esq., [http://www.litigationandtrial.com/2010/09/articles/series/special-comment/ebay-v-newmark-al-franken-was-right-corporations-are-legally-required-to-maximize-profits/ "eBay v. Newmark: Al Franken Was Right, Corporations Are Legally Required To Maximize Profits"] (September 13, 2010)</ref> this does not imply that executives are legally obligated to maximize shareholder value.

As shareholder value is difficult to influence directly by any manager, it is usually broken down in components, so called value drivers. A widely used model comprises 7 drivers of shareholder value,<ref>''Corporate Financial Strategy'', Ruth Bender, Keith Ward, 3rd edition, 2008, p. 17</ref> giving some guidance to managers:
* Revenue
* Operating Margin
* Cash Tax Rate
* Incremental Capital Expenditure
* Investment in Working Capital
* Cost of Capital
* Competitive Advantage Period

Looking at some of these elements also makes it clear that short term [[profit maximization]] does not necessarily increase shareholder value. Most notably, the competitive advantage period takes care of this: if a business sells sub-standard products to reduce cost and make a quick profit, it damages its reputation and therefore destroys competitive advantage in the future. The same holds true for businesses that neglect research or investment in motivated and well-trained employees. Shareholders, analysts and the media will usually find out about these issues and therefore reduce the price they are prepared to pay for shares of this business. This more detailed concept therefore gets rid of some of the issues (though not all of them) typically associated with criticism of the shareholder value model.

Based on these seven components, all functions of a business plan and show how they influence shareholder value. A prominent tool for any department or function to prove its value are so called shareholder value maps that link their activities to one or several of these seven components. So, one can find "HR shareholder value maps", "R&D shareholder value maps", and so on.