Maximizing Shareholder Value

Maximizing Shareholder Value

In finance, there is a common term known as the management principle, also at times referred as the value based management, which basically means that managers' primary goal is to maximize shareholders' value. In other words managers strive to increase the value of the stocks of a company and increase value of stocks or by increasing the dividends paid. Dividends are redistributed profits, which a firm pays to its shareholders from the profits left after paying all taxes and expenses. Indeed, many investors choose which stocks to acquire by the dividends the shares pay (earnings per share).

A model of shareholder value maximization is discussed in the literature and includes seven value drivers, namely revenue, operating margin, cash tax rate, incremental capital expenditure, investment in working capital, cost of capital and competitive advantage period. Further, some strategies of shareholder value maximization correspond to elements typically associated with business growth and development, such as investment in research and development, training and motivation of employees, corporate social responsibility (CSR), profitable sales strategies and so on. In turn, CSR may impact a company very positively by enhancing its reputation. Therefore, some believe that investors are more willing to invest in companies with demonstrated positive CSR. Moreover, recently companies exert efforts in keeping with environmentally friendly strategies. Indeed, many companies showcase how they are going green, by attempting to use less paper billing, among other things.

Interestingly, the model has often been criticized. For example, as is often the case with any business endeavour, short term goals may contradict long term goals. In other words, common sense dictates that making a quick buck may often affect negatively a long term growth and development business strategy. Hence, a focus too narrowly concentrated on maximizing shareholder value, may lead a company to several problems, such as increased risk, lack of transparency and shortsighted business strategy.

Bank of Montreal logo. There is a distinction between commercial (for profit) and central banking. Photo: Elena