Shareholder value

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Shares and shareholders.

Shareholder value is the value, or wealth, enjoyed by shareholders.

Maximising long-term value for shareholders is a fundamental principle of corporate governance.

The term 'shareholder value' describes the general trend away from historical accounts-based measures of performance, and toward economic value-based measures.

In simple terms, shareholder value is added or created when the rate of return from the firm's investments exceeds its cost of capital.

In other words, when the Internal rate of return from investment projects exceeds the appropriately risk-adjusted Weighted average cost of capital.

Shareholder value management emphasises the consequences of management decision-making in terms of resulting market values, rather than in terms of purely accounting-based measures such as accounting profits or earnings per share.

Shareholder value calculations take account of:

(i) The market value of shares;

(ii) Dividends paid out to the shareholders;

(iii) Capital introduced by the shareholders; and

(iv) Capital returned to the shareholders.

Shareholder value also means current directors acting in the interests of shareholders, even when it is not in the personal interest of the directors.

For example, there might be a takeover bid on attractive terms for the whole organisation, or for some or all of its trading assets.

In such a case the directors should recommend accepting the bid, if it would be advantageous for the current shareholders.

This would also include cases where the current directors would likely be replaced by the new owners.

See also