The Role of the Concept of

Shareholder Value in the Context of

Value Based Corporate Management
Dr. Dieter Weinmann
Heidelberg, 19.03.2010

Agenda
The Concept of Shareholder Value
Value Based Coporate Management
Shareholder Value Concept and
Value Based Management

Dieter Weinmann

Agenda
The Concept of Shareholder Value
Value Based Coporate Management
Shareholder Value Concept and
Value Based Management

Dieter Weinmann

Shareholder Value - I
Is an indicator for all future payments
of a company investment
Is the Value of one share multiplied
with the amount of shares
Is the Value of the Company
Are the expected dividends of the
company for all shares

Dieter Weinmann

Shareholder Value - II
If capital markets are efficient,
Investors choose either those shares,
that provide the highest return when
having the same risk class or those
shares, that provide the lowest risk
when having the same return rate.
So it is clear, that an investor
chooses those shares, from which the
highest accumulated payments in
the future can be expected.
Dieter Weinmann

Shareholder Value III

(Alfred Rappaport, 1995)
Internal/
external ShareStakeholder
Value benefit

Target

Gaining
Value/
Shareholder
Value

Valuation
Field

Net CashFlow

Discount
Rate

Capital
structure

Value
Generator

Sales
growth,
Profit
margin,
Tax Rate

Capital
assets

Capital
Costs

Business
internal/
external

Investme
nts

Financing

Steering
Possibilities

Prognosis
horizon

Dieter Weinmann

Agenda
The Concept of Shareholder Value
Value Based Coporate Management
Shareholder Value Concept and
Value Based Management

Dieter Weinmann

Value Based Coporate Management

Stakeholder
The Stakeholder of a company are
the Management and the
investors/capital provider
In the past the external shareholders/
stakeholders wanted the managment
to maximize the share value

Dieter Weinmann

Value Based Coporate Management

Motivation of the Management
The Owner(-Group) of a company is
interested in keeping the company
alive
If paid with a fix salary, the
Management is interested in
satisfying their own prefences, but
the owners are interested in
maximizing the profit
Principal-Agent-Theory
Dieter Weinmann

Principal-Agent-Theory
Ownership and Management is separated
Owner(-Group) is/are the Principal
Management is the Agent
Usually the Agent has an Information-Advantage, because
he/she has a deeper insight into the company
Because everybody maximizes his/her own utility, it is likely,
that the agent acts against the interests of the Principal
This is called Moral Hazard

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Value Analysis for Corporate

Restructuring
2

0,5
-1,5

3
-1
4

2,5

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Agenda
The Concept of Shareholder Value
Value Based Coporate Management
Shareholder Value Concept and
Value Based Management

Dieter Weinmann

12

Shareholder Value Concept and

Value based Corporate Management
Separating Enterprise Value and
Shareholder Value:
For internal calculation of the
Enterprise Value, there is much more
information available than at the
stock market for the shareholder
value.
Often differences between internal
calculated value and stock market
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Critics for the Concept of the

Shareholder Value:
Methodical:
- It is not possible to determine exactly
the Enterprise Value and Shareholder
Value including the capital costs,
because the capital market is
inefficient
- Problems with the Motivation for the
Management (Agent), to act like the
owners would like them to
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Critics for the Concept of the

Shareholder Value:
- The success-values in accounting can be
manipulated in several ways (e.g. for
company-political reasons for getting a
loan or for getting a good position in a
company ranking, etc.)
- The traditional Market Value Methods expect,
that the payments of the past, also last in the
future and do not consider the environment
and development of the company, which
could lead to other payments
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Conclusion
Pro Shareholder Value:
SV is a good tool for evaluating
strategies
Prerequisites:
Right to interact of Shareholders
Right for information of Shareholders
Salary for Managers correlated to SV
Organizational Model has to be
compatible
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Conclusion
Con Shareholder Value:
The Concept of the Shareholder Value is not able to
paint a complete picture of a company
SV fosters short-term thinking
SV destroys the consensus between Management
and Employees
Quoting Rappaport, SV is for long-term strategies
Investments are often paying off in the long run, but
then the management has already changed
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Thank you
for Your Attention!

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BackUp

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Determination-problems of the
Shareholder Value I
- every future-prognosis is unsecure
- uncertainty increases, with the
amount of time
??

today

- constant-growth-model is also not

realistic
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Determination-problems of the
Shareholder Value II
- In the Concept of the Shareholder
Value, only the maximization of
payments is considered.
- Values that arent quantifiable, arent
considered at all

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Shareholder Value Concept and

Value based Corporate Management
Managers are mostly paid in relation to
the shareholder value.
What consequences are to be
expected?
Good or bad?
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Shareholder Value - II
Shareholder Value = Total Company Value Value of external capital
Dividend Discount Model (DDM):
T
Dt
D1
D2
DT
PV0 MV0

...

2
T
t
1 e (1 e)
(1 e)
(
1

e
)
t 1

= Present Value, Market Value

PVt MVt
= Discount Percentage
e
= Dividend in period t
Dt

(including Liquidation in period T)

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Shareholder Value - III

Easy calculation of the Market Value
with the model of Gomez and Weber:
Calculating with the never-ending Operating Free CashFlow (OFCF):

OFCFn
FinalCompanyValue n 1
e

OFCFn
e

= never-ending Operating Free Cash-flow

= Discount Percentage

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Shareholder Value - IV
Operation Free Cash Flow:
Operating Profit
+ writedowns
+ Increasement of reserves
= Operating Cash-flow before taxes

(EBIT)

- Income-Tax
= Operating Cash-Flow after taxes
- Increasement of working capital
- Netto-investments in assets
= Operating Free Cash Flow
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