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Creating Shareholder Value: A Guide For Managers And Investors
The ultimate test of corporate strategy, the only reliable measure, is whether it creates economic value for shareholders. Now, in this substantially revised and updated edition of his 1986 business classic, Creating Shareholder Value, Alfred Rappaport provides managers and investors with the practical tools needed to generate superior returns. After a decade of downsizings frequently blamed on shareholder value decision making, this book presents a new and indepth assessment of the rationale for shareholder value. Further, Rappaport presents provocative new insights on shareholder value applications to: (1) business planning, (2) performance evaluation, (3) executive compensation, (4) mergers and acquisitions, (5) interpreting stock market signals, and (6) organizational implementation. Readers will be particularly interested in Rappaport's answers to three management performance evaluation questions: (1) What is the most appropriate measure of performance? (2) What is the most appropriate target level of performance? and (3) How should rewards be linked to performance? The recent acquisition of Duracell International by Gillette is analyzed in detail, enabling the reader to understand the critical information needed when assessing the risks and rewards of a merger from both sides of the negotiating table.
The shareholder value approach presented here has been widely embraced by publicly traded as well as privately held companies worldwide. Brilliant and incisive, this is the one book that should be required reading for managers and investors who want to stay on the cutting edge of success in a highly competitive global economy.
The shareholder value approach presented here has been widely embraced by publicly traded as well as privately held companies worldwide. Brilliant and incisive, this is the one book that should be required reading for managers and investors who want to stay on the cutting edge of success in a highly competitive global economy.
224 pages, Kindle Edition
First published December 5, 1986
47 people are currently reading
833 people want to read
About the author
Alfred Rappaport
18Ìýbooks17ÌýfollowersMichael J. Mauboussin is Chief Investment Strategist at Legg Mason Capital Management. Prior to joining LMCM in 2004, Michael was a Managing Director and Chief U.S. Investment Strategist at Credit Suisse. Michael joined CS in 1992 as a packaged food industry analyst. He is a former president of the Consumer Analyst Group of New York and was repeatedly named to Institutional Investors All-America Research Team and The Wall Street Journal All-Star survey in the food industry group.
Michael is the author of Think Twice: Harnessing the Power of Counterintuition (Harvard Business Press, 2009) and More Than You Know: Finding Financial Wisdom in Unconventional PlacesUpdated and Expanded (New York: Columbia Business School Publishing, 2008). More Than You Know was named one of The 100 Best Business Books of All Time by 800-CEO-READ, one of the best business books by BusinessWeek (2006) and best economics book by Strategy+Business (2006). He is also co-author, with Alfred Rappaport, of Expectations Investing: Reading Stock Prices for Better Returns (Harvard Business School Press, 2001).
Michael has been an adjunct professor of finance at Columbia Business School since 1993 and is on the faculty of the Heilbrunn Center for Graham and Dodd Investing. In 2009, Michael received the Deans Award for Teaching Excellence. BusinessWeeks Guide to the Best Business Schools (2001) highlighted Michael as one of the schools Outstanding Faculty, a distinction received by only seven professors.
Michael earned an A.B. from Georgetown University. He is also affiliated with the Santa Fe Institute, a leading center for multi-disciplinary research in complex systems theory, and is on the board of directors of Sermo, an online community for physicians."
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Displaying 1 - 4 of 4 reviews
August 21, 2018
During the summer InvestingByTheBooks will review some older books that we never got around to writing about although we think they are important. Alfred Rappaport’s Creating Shareholder Value from 1986 is a yardstick for the shareholder value movement. The author shows how corporate managers can apply the shareholder value approach to managing companies and supplies the tools for doing so. Hence, the main audience is corporate managers but the book is equally useful to anyone on the financial markets as it addresses issues bordering between business and finance.
The introductory chapter is of more philosophical nature than the remainder and the author develops his thoughts on why the shareholder value approach is the one to adhere to for businesses. Rappaport points to the moral aspects of the proprietorship that comes with owning something and to the efficiency aspects of optimized capital allocation and how the model benefits the broad masses through both their pensions and higher economic growth � in essence this is how the world rose from the middle ages. It’s much the same discussion that is being held today 30 years later. In retrospect it’s obvious that the CSR and stakeholder camp is winning the match by a mile at the moment. Capitalism is not en vogue in 2015.
The author explains the concept of shareholder value as the present value of all future free cash flows discounted by the cost of capital, net of net debt. Value is created by investing capital in the business that generates a return on investment which is higher than the cost for the invested capital. Thus, trying to increase shareholder value includes handling all the difficult choices between investing now to hopefully generate higher cash flow in the future. Rappaport is careful to differentiate the creation of shareholder value from the shareholder return on the stock market. The latter will only correlate to the former on average and over long term. He also contrasts the creation of shareholder value to the shortcomings of accounting based estimates of value creation. “How can so many managers continue to believe that stock prices are driven by short-term accounting numbers despite impressive evidence to the contrary?� Most still haven’t understood.
To me the most interesting chapters are those where Rappaport not only links the creation of shareholder value to corporate strategy and execution but also manager evaluation and remuneration. The author discusses the chance of gaining a competitive advantage in various industries and shows that management can work with a number of value drivers to increase shareholder value a) sales growth rate, b) profit margin, c) working capital investment, d) fixed capital investment and e) the cost of capital. By breaking this down on “value driver maps� the KPIs, the leading indicators, that have the highest impact on the value drivers for a specific company can be located, be it measures of customer satisfaction, quality improvements etc.
Options were for Rappaport a way to try to mitigate the risk that management would enrich themselves at the expense of the owners of the company. The author advices that the allocation of options should be tied to the above leading indicators and that to the extent the share performance plays a role, one must look to the relative price performance compared to industry peers. Today, with the benefit of hindsight of the excesses of the period around the millennium the text on options strikes you as a bit naïve. There is nothing wrong with the intent but the insight in how greedy persons would use the carte blanche of issuing options isn’t there.
Creating Shareholder Value is a short concise book. It’s theoretically stringent and you often perceive what’s being said as obvious when stated but it doesn’t go into much detail as it sweeps over several important topics. This important text makes it blatantly obvious that the short-termism that the shareholder movement often is accused of is a faulty later day rationalization.
The introductory chapter is of more philosophical nature than the remainder and the author develops his thoughts on why the shareholder value approach is the one to adhere to for businesses. Rappaport points to the moral aspects of the proprietorship that comes with owning something and to the efficiency aspects of optimized capital allocation and how the model benefits the broad masses through both their pensions and higher economic growth � in essence this is how the world rose from the middle ages. It’s much the same discussion that is being held today 30 years later. In retrospect it’s obvious that the CSR and stakeholder camp is winning the match by a mile at the moment. Capitalism is not en vogue in 2015.
The author explains the concept of shareholder value as the present value of all future free cash flows discounted by the cost of capital, net of net debt. Value is created by investing capital in the business that generates a return on investment which is higher than the cost for the invested capital. Thus, trying to increase shareholder value includes handling all the difficult choices between investing now to hopefully generate higher cash flow in the future. Rappaport is careful to differentiate the creation of shareholder value from the shareholder return on the stock market. The latter will only correlate to the former on average and over long term. He also contrasts the creation of shareholder value to the shortcomings of accounting based estimates of value creation. “How can so many managers continue to believe that stock prices are driven by short-term accounting numbers despite impressive evidence to the contrary?� Most still haven’t understood.
To me the most interesting chapters are those where Rappaport not only links the creation of shareholder value to corporate strategy and execution but also manager evaluation and remuneration. The author discusses the chance of gaining a competitive advantage in various industries and shows that management can work with a number of value drivers to increase shareholder value a) sales growth rate, b) profit margin, c) working capital investment, d) fixed capital investment and e) the cost of capital. By breaking this down on “value driver maps� the KPIs, the leading indicators, that have the highest impact on the value drivers for a specific company can be located, be it measures of customer satisfaction, quality improvements etc.
Options were for Rappaport a way to try to mitigate the risk that management would enrich themselves at the expense of the owners of the company. The author advices that the allocation of options should be tied to the above leading indicators and that to the extent the share performance plays a role, one must look to the relative price performance compared to industry peers. Today, with the benefit of hindsight of the excesses of the period around the millennium the text on options strikes you as a bit naïve. There is nothing wrong with the intent but the insight in how greedy persons would use the carte blanche of issuing options isn’t there.
Creating Shareholder Value is a short concise book. It’s theoretically stringent and you often perceive what’s being said as obvious when stated but it doesn’t go into much detail as it sweeps over several important topics. This important text makes it blatantly obvious that the short-termism that the shareholder movement often is accused of is a faulty later day rationalization.
December 1, 2019
Offers a framework to introduce and sustain Shareholder Value based culture in an organization. The book offers a comprehensive step-by-step approach that includes strategic planning, portfolio review and resource allocation, performance evaluation, incentive compensation and investor communication.
While the literature presented here is for corporations, the same ideas can be applied at the individual level to correctly adopt a shareholder value approach to portfolio management and investment. The last chapter is brilliant in this aspect, covering The Shareholder Scoreboard that is published in age Wall Street Journal and the Expectations Risk Index, a ratio that can be calculated to determine how feasible investment expectations can materialize with current and projected performance data.
While this book dates from the 90s, the concepts still apply: sound investment theory never gets old and Rappaport makes here another great contribution to the financial literature section of any library.
While the literature presented here is for corporations, the same ideas can be applied at the individual level to correctly adopt a shareholder value approach to portfolio management and investment. The last chapter is brilliant in this aspect, covering The Shareholder Scoreboard that is published in age Wall Street Journal and the Expectations Risk Index, a ratio that can be calculated to determine how feasible investment expectations can materialize with current and projected performance data.
While this book dates from the 90s, the concepts still apply: sound investment theory never gets old and Rappaport makes here another great contribution to the financial literature section of any library.
October 7, 2020
An excellent, foundational book on value creation. This is a book that has stood the test of time. Highly recommend this.
February 24, 2016
earnings/growth does not necessarily mean creating shareholder value!
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