Any business has three levels of value definition – value defined by shareholders, customers and employees/partnership. Customers provide medium term liquidity and employees the operational cash flow to ensure the continued operation of an enterprise. Shareholder value is however the primary value component no business can survive without and provides for the long term agility of an organisation.
Shareholders create wealth by creating business units and setting expectations of the return that can be gained by each business unit. Shareholders determine where and how they will invest their money. These decisions are made by determining the return on investment that will be delivered a particular business model. The return on development is decided by understanding market sentiment, investment risk and appointing the correct management to the business. Wealth creation includes the decision making processes of whether a business unit grows organically or through acquisition.
The scope of a business is determined in terms of what elements of the total value chain will be covered by the business. It is critical to deploy business processes that facilitate accurate communication between shareholders and the businesses they invest in. Even non-profit organisations and government organisations have shareholders in terms of either their members or the citizens of a country. If the shareholder does not perceive any value from an enterprise the enterprise will follow a slow death. Major pressure has mounted on businesses to accurately report the current state of the business to shareholders. Any transformation project on an enterprise wide scale must be assessed in terms of its impact on the business’s ability to create shareholder wealth. Mos change programs do put in sufficient effort to explore value creation opportunities from a shareholder perspective. The possibility of successful transformation is much higher when the shareholder community is informed of the long term benefits of changes. Enterprise transformation strategies must view the world from an enterprise perspective and must ultimately measure its success in terms of the impact the change will have on wealth creation.
Business transformation must view the business from several levels of abstractions based on different systemic viewpoints. The highest order level is a shareholder’s view of the business e.g. does the design create wealth. Wealth creation considers the enterprise without taking into account the nature and markets of the enterprise. Wealth creation competes, for sustained shareholder interest and investment, across all industries and other investment opportunities. The design decisions are made to optimise the return on investment for shareholders. The board of directors of an enterprise should take ultimate responsibility for the wealth creation performance of an enterprise.
- Capitilise current operating profits at the rate that compensates investors for bearing risks
- Employ tax benefit of debt in management's target capital structure
- The present value of the economic value added by new capital projects are available until new entrants and substitutes compete away the exceptional profit potential
- 1990, G.B. Steward III, The quest for value - A guide for senior managers, HarperCollins, Publishers Inc.