International Finance Critically Assess: How

International Finance

Critically assess: How can shareholder value be enhanced and measured? In the United Kingdom context with illustrated examples of some UK ftse 350 companies

Most of UK companies describe themselves as being in the business of maximizing value for their shareholders, but the bigger question remains; how is the value defined, measured and managed? Many of these companies have come up with corporate mission statements, which seem to be real to the firms on their day-to-day operations. Most recent, cases of accounting scandals have been witnessed. Its evident that despite the mission statement that seems to attract shareholders and promise to them value, the interests of these companies are given the first priority. For instant, the collapse of Encon and palmat destroyed the value for both their shareholders and stock holders, with many employees loosing their jobs and pensions. This can be accounted to decisions that do not take long-term value into consideration. Value destroying decisions are usually not driven by greed or dishonesty. Instead they are a result of pursuing legitimate business objectives. Like growth or increasing market share. Problem that is experienced is that managers lack the understanding of difference between decisions that result to higher profits and those that create value.

Enhancement of the shareholder value

As a result of the intro, a couple of approaches have been put in place to enhance the value of shareholders. Early 2004, the international Federation of Accountants (IFAC) in partnership with CIMA -- published the report "Enterprise governance -- getting the balance right"(. This report gave holistic views of the companies in FISE. Enterprise governance is described as " a set of responsibilities and practices exercised by the board and effective management with the goal of providing strategic direction, ensuring objectives are achieved, ascertaining that the risks are managed appropriately and verifying that organization resources are used responsibly." (Information systems Audit and control Foundation, 2001)

The report (Enterprise governance) acted as a reminder not to overlook the performance side of the enterprise governance framework. It covers the philosophy and practice of managing for long-term value. Value-based management (VBM) is a widely used approach. VBM is an attempt to bring back basis of value creation and focus on acceptable returns on capital of shareholders that is at heart of the market economy. In a more specific concept, VBM can be narrowed to management approach, or philosophy, characterized by the metrics used to measure performance. VBM is used as a gauge to how whether or not a company is generating value for its shareholders, by measuring the difference between a return on equity (return) and the cost of capital. Value base management is an attempt to bring back basis of value creation and focus on what matters to those who own companies; which is acceptable return on their capital.

Mciaggard defines VBM as "formal systematic approach to managing companies to achieve the objective of maximizing value creation and shareholders value over time" (Mctaggart et al., 1994) According to Copeland, VBM "is an approach to management whereby the company's overall aspirations, analytical techniques and management processes are all aligned to help the company maximize its value by focusing management decision- making on the key drives of value." Companies such as Boots, llogdstsb and Cadbury Schweppes, adopted VBM agent and were making explicit public commitments to increase shareholders value.

In 2002, research from PA consulting claimed that companies with VBM agenda manage to create value even during turn of markets. It is realized that VBM can barely operate during difficult times of market downturn. It is perhaps time to further the investigation, establish whether managing shareholders value can be part of the solution to restore the faith in capital markets. Creating shareholders value calls for strategy; companies ought to be managed for shareholders value. Creating value is not about applying a prescribed set of tools but about creating competitive advantage in the market place "managing for value begins with strategy and ends with financial results." Strategy lies at the heart of enterprise success. Strategic planning is a main focus of management for value. Successfully strategies are the end products of a structural and disciplined decision-making process.

Research has focused on the relationship between firm capabilities and actual consumption market performance measures such as market share, brand awareness, and customer satisfaction. First, with high opinion to customer satisfaction, the relationship between customer satisfaction and stock prices suggests customer satisfaction leads to excess returns, and that satisfied customers are economic assets with high return/low risk (Fornell, Mithas, Morgeson III, & Krishnan, 2006). advanced levels of customer discontent harm the firm's prospect stock returns, leading to a conclusion that reducing customer discontent can't boost a firm's stock returns (Luo, 2007). The effects of both customer contentment and customer complaint on the stock value gap of firms are also addressed (Luo & Homburg, 2008). Customer contentment is related to stock prices, on the basis of abnormal portfolio returns compared against the risk-adjusted benchmark portfolio (Luo & Nguyen, 2008).

Second, product quality and new product improvement are found to have impacts on financial performance. The impact of product quality on stock market value is assessed using an event study that examines how information about the quality of the new products of a firm affects abnormal returns (Tellis & Johnson, 2007). The magnitude of the economic impact of being late to the market by analyzing a sample of 101 new product delay announcements made by firms indicates the importance of managing product development effectively (Hendricks & Singhal, 1997). The short- and long-term impact of marketing actions on financial metrics are investigated, including top-line, bottom line, and stock market performance by comparing the effects of new product introductions and sales promotions on the firm's performance and investor's performance (Pauwels, Silva-Risso, Srinivasan, and Hanssens, 2004).

Third, advertising and R&D are considered as significant factors that influence financial returns. The stock price is shown to incorporate the investor's unbiased beliefs about the value of R&D (Chan, Josef & Sougiannis, 2001). pragmatic evidence for the long-term benefit of R&D in terms of stock return and operating performance shows that R&D increases are beneficial investments, but the market is over and over again slow to recognize the full extent of those benefit (Eberhart, Maxwell & Siddique, 2004). A firm's advertising and R&D expenditures may produce consciousness and support among both finance executives and senior management. In fact, much less is known about the connection between important indicators of marketing strategy and systematic risk. After accounting and finance factors related to systematic risk are controlled, increases in advertising/sales and R&D/sales can lower a firm's systematic risk (McAlister, Srinivasan & Kim, 2007).

Fourth, financial markets tend to respond to societal donations by firms.

Companies perceived as having a strong corporate social responsibility (CSR) dedication often have an increased ability to attract and to retain employees (Turban and Greening, 1997). marketing capabilities oriented toward increasing financial performance of the firm, the field of CSR has grown exponentially in the last decade. A better number of companies than at any time before are engaged in an intensive effort to define and integrate CSR into all aspects of their businesses. An increasing number of shareholders, analysts, regulators, activists, labor unions, employees, community organizations, and news media have initiated activities leading companies to be more responsible for an developing set of CSR issues. Accordingly, there is increasing demand for governance transparency and growing expectations that corporations measure, report, and continuously improve their social, environmental, and economic performance (Tsoutsoura, 2004). CSR affects market value partially through the intermediary of customer satisfaction and returns to CSR can be both positive and negative depending on the level of firm's capabilities (Luo & Bhattacharya, 2006).

Of the One of the great advantages of shareholders value as a governing objective is that it demands continual improvement. There is no time when you can sit back and admire your achievements. The measurement is obvious to all, both inside and outside of the company. There is no hiding place. There are various ways of making the actual process of decision-making more structured and explicit- rather than just outcomes. Companies should be able to understand where value is created, destroyed and pinpointed the real drivers of value. There are claims that the ability to increasingly generate superior total shareholder returns over time is the ingle measurement of corporate management performance. The most challenging objective a company can set itself, "it requires delivering outstanding levels of current performance while building a legacy for the future," says one economist. He claims that those companies that have had such objective have prevailed over their competitors year after year, while generating wealth for their owners (drivers / shareholder).

Differentiating the business from company is the key to generating greater shareholder value (returns). By creating this difference, a company (firm) will be more successful and creates a better value for its shareholders, he adds. Companies that adopt shareholder value management ought to revise their pay policies to support the new focus. Thus aims at making interests of employee and shareholder similar and increasing the ownership of the company's share by employee, through profit-sharing schemes; share saving schemes and share option schemes, as a key way of achieving this.

Apart from strategic planning, focus on good quality performance information is important through creation of alternatives as well as the means to implement them. Good quality information is needed for both strategic and operational decisions. Companies waste time trying to obtain and reconcile numbers from different systems, which means they lack integrated view about where the value is being created or destroyed in the business. This leads to speculation instead of coming up with strategic choices. Instead of having confidence in what is undoubtedly the determining factor of their success or failure, companies strategic planning as dogged by the uncertainty, this is the main reason many companies in FTSE, fail to achieve shareholder value. A great number of these companies have accepted that maximizing shareholder value as the principal objective in the market place. Strategic planning is there to replace wavering by many companies as they hope something good will comes out of it (wavering). Lloyds TSB being one of the companies in FTSE UK which adopted the Value-Based Management (VBM) agenda achieved greatly that it doubled its shareholder value in every 3 years.