The first few chapters of this book linked the objective of shareholder wealth maximisation and

acceptance or otherwise of proposed projects. This required knowledge of the concepts of the time
value of money and the opportunity cost of investors’ funds placed into new investments. If managers
are unable to achieve returns at least as high as those available elsewhere for the same level of risk,
then, as agents for investors, they are failing in their duty. If a group of investors places £1m in the hands
of managers who subsequently generate annual returns of 10 per cent, those managers would in effect
be destroying value for those investors if, for the same level of risk, a 14 per cent return is available
elsewhere. With a future project the extent of this value destruction is summarised in the projected
negative NPV figure. This technique, and the underlying concepts, are well entrenched throughout
modern corporations. However, the full potential of their application is only now dawning on a few
particularly progressive organisations. Applying the notion of opportunity cost of capital and focusing on
the cash flow of new projects rather than profit figures is merely skimming the surface. Since the mid-
1980s a growing band of corporations, ranging from Pepsi in the USA to Lloyds bank in the UK, have
examined their businesses, or parts of their businesses, in terms of the following questions: l How much
money has been (or will be) placed in this business by investors? l What rate of return is being (or will
be) generated for those investors? l Is this sufficient given the opportunity cost of capital? These
questions can be asked about past performance or future plans. They may be asked about the entire
organisation or about a particular division, strategic business unit or product line. If a line of business
does not create value on the capital invested by generating a return greater than the minimum required,
then managerial attention can be directed to remedying the situation. Ultimately every unit should be
contributing to the well-being of shareholders. The examination of an organisation to identify the
sources of value may not seem particularly remarkable to someone who has absorbed the concepts
discussed in Chapters 1 to 8, but to many managers steeped in the traditions of accounting-based
performance measures such as profits, return on investment and earnings per share, they have
revolutionary consequences. The ideas themselves are not revolutionary or even particularly new. It is
the far-reaching application of them to create a true shareholder value-orientated company that can
revolutionise almost everything managers do.