How to create shareholder value
You’ve taken your company public and made some money off stock sales – but now what? You have a new group of stakeholders, and they care deeply about profits. They want to see a return on their investment, and who could blame them?
The marketing world is changing, and businesses are concerned with their authenticity and branding more than ever before. While “social responsibility” and “shared values” are the latest buzzwords, focusing on shareholder value isn’t a popular marketing strategy. But when you take a step back and think about it, you’ll see why you should still care about shareholder value creation.
The truth is that when you think about creating shareholder value, you’re really considering how to make more money. Any smart business owner has a long-term plan to increase the value of their company – and drive a successful business – with profits higher than its costs, which will automatically create shareholder value.
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What is shareholder value?
In short, shareholder value is the value of the investor’s stock in the company. If the value goes up and the investor can sell the stock for more than they bought it for, that’s an increase in shareholder value. Attitudes toward maximizing shareholder value have changed over the years, with some managers now believing that it’s not as important and can lead to rushed decisions that don’t consider long-term consequences – but this isn’t necessarily true.
How do I maximize shareholder value?
A good long-term strategy to maximize shareholder value has to take a wide-angle view. It must include everyone, not just the shareholders – suppliers, employees and customers. When you make all your stakeholders happy, your business value increases – and so does your shareholder value.
In order to create this synergy between all your stakeholders, you need to do several things: increase sales (thereby increasing revenue), increase profits and embrace a long-term mindset.
1. Increase your sales
The most obvious step to shareholder value creation is to increase your sales. This has to do with more than just running a promotion or raising your prices. First, you must make sure you choose the right customers: those who need your product or service. You also have to find the right price. Not too low, or you won’t make any profit, but not too high, or you’ll lose customers.
Differentiating your products or services is another top way to increase your sales. The more you have to offer, the more people have to buy. When was the last time you brought something new to market? Giving people new options means they can keep coming back to your brand again and again – and repeat customers are a company’s gold mine.
Keeping the customers you have is much easier than attracting new ones. When you earn repeat customers, make sure to treat them well. Offer reward programs and provide great customer service. Get your existing customers to come back more, and shareholder value will increase.
2. Increase your profits
To increase your profits, you need to increase productivity, streamline your processes and create a lean, mean business machine. In today’s world, technology rules – and you need to get in on the secret.
Make sure you’re using the latest technology to improve efficiency wherever possible, from faster communication to easier collaboration via document sharing or videoconferencing. Automate anything you can, from payroll to collecting and reviewing resumes, to expense tracking and timesheets.
Increasing efficiencies also includes things like renegotiating contracts and outsourcing certain tasks, which will free up your employees for more important items. Focusing more on your company’s core revenue-generating activities is better for it in the long run. Outsourcing can help you speed up your processes too, as outside firms are often more agile. Or, consider hiring part-time help instead of full-time.
Along the same lines, make sure your employees have all the resources they need to do their jobs – including time. Yes, time is a resource! Help your employees learn time management skills, and give them SMART goals, which are specific, measurable, attainable, realistic and timely, to help them be more productive. Be clear about day-to-day tasks that front-line employees can perform that will help increase shareholder value, whether this is creating realistic deadlines or providing excellent customer service. Letting your employees know exactly what you expect of them is one major way to increase efficiencies.
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3. Embrace a long-term mindset
Focusing on your reported earnings is much too short-term. The long-term view is to scale mindfully and maximize your expected value. According to the Harvard Business Review, it can take more than 10 years of maximizing free cash flows to justify the stock prices of many companies.
If you focus only on your reported earnings, you could miss out on strategies that will be good for your company down the road, such as acquiring another company. In the short term, the cost of the acquisition could have a negative impact on your earnings per share. However, once the company starts to add value, you’ll see stock prices rise.
You also need to provide the right incentives, for employees and C-suite executives alike. Pay your front-line employees right – not too low or they won’t stick around, but not too high or it will cut into your profits. Invest in training your employees as well. Proper training leads to empowered employees who feel able to do their jobs – not frustrated ones who want to quit.
If you incentivize your C-suite to go after short-term rewards, they will. But if you set specific SMART goals that all ladder up to long-term profitability and reward them for reaching those, you’ll truly maximize shareholder value. Even standard stock options and cash bonuses typically provided as a benefit can incentivize short-term thinking. Encourage your execs to hold on to their stock with longer vesting periods and use indexed options, which reward them for performance as compared to their peers, not compared to the previous price of the company’s stock.
Shareholder value creation isn’t about short-term profits or quarterly balance sheets. It’s not about inflating your stock prices so shareholders can sell, sell, sell. It’s about long-term planning that considers all of your stakeholders, including your employees and customers. Keep this in mind, and your business will enjoy a long and successful life.
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