Professional Documents
Culture Documents
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Shareholder Value
Is a business term sometimes referred to as shareholder value
maximization which implies that the ultimate measure of a
company success is the extent to which it enriches shareholders.
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• A Sacco’s shareholder value
depends on:
• Strategic decisions made by
its board of directors and
senior management,
• Including the ability to make
wise investments and
generate a healthy return on
Shareholder Value invested capital.
• If this value is created,
particularly over the long
term, the share price
increases and the Sacco can
pay larger cash dividends to
shareholders. 5
Shareholder value can
become a hot button issue
for corporations, as the
creation of wealth for
shareholders does not
Shareholder Values always or equally
translate to value for
employees or customers
of the corporation.
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• Shareholder value is maximized
when a firm maximizes its
growth opportunities by
making superior financing and
investing decisions, while
optimally managing the
operational risks of the
business.
Shareholder value • This includes minimization of
earnings and cash flow
volatility.
• It also includes minimization
and optimization of the cost of
capital through alternative
financing vehicles.
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What is value-based management (VBM)?
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Value-based management (VBM) includes:
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Creating Shareholder Value – Strategy
Creating value is not about applying a prescribed set of tools or
processes but about creating competitive advantage in the
marketplace.
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Ways to Create Shareholder Value (3 of 3)
Make new
Return cash to
products/acquisitions that Carry only assets shareholders when there
maximize expected value,
even at the expense of that maximize are no credible value-
creating opportunities to
lowering near-term value. invest in the business.
earnings.
Value-creating growth is
Eliminate the practice of
the strategic challenge, and
delaying or forgoing value-
to succeed, companies
creating investments to
must be good at developing
meet quarterly earnings
new, potentially disruptive
targets
businesses.
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Ways to Create Shareholder Value
Saccos focused on short-term performance measures are doomed to fail in
delivering on a value-creating growth strategy because they are forced to
concentrate on existing businesses rather than on developing new ones for the
longer term.
Ensure proper, fair, objective and balanced Remuneration of employees who are
generators of the Sacco values.
Shareholder value has to be led from the top. “If the top team does not change the way it
does things, then the drive for shareholder value will fail. People do what their bosses do
and the board has to lead by what they are doing, not what they’re saying
Financial visibility and performance are a key part of managing for shareholder value
and often the strategy side of the business fits in well with the finance director’s role.
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Managing for Shareholder Value
• Culture
• Creating value is not a one-off event that comes about as a result of a major strategic
breakthrough.
• It is a continuous cycle, supported by the sum of strategic and operational decisions
made throughout the Sacco
• Value Based Management (VBM) is embedded into company culture, to the extent
that it becomes second nature
• VBM begins and ends with changing performance measures. Managers assume that
if they start measuring and reporting economic profit, the performance itself will
somehow improve and the markets will reward them accordingly
• There needs to be a comprehensive and regular communication programme
involving all employees. Value is created throughout the company, not just at the top,
so the relevant aspects of VBM need to be adapted to the individual context of a
particular role.
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Managing for Shareholder Value
• Structure
• Ensure clarity in decision-making, they need to know precisely
where in the organisation value is created and destroyed
• Align different parts of the organisation with the overall strategic
direction and doing so in a way that makes strategic choices
visible.
• Determining the right roles and responsibilities enables managers
to achieve the highest degree of accountability for creation and
destruction of value
• A shared commitment to the VBM philosophy plays a key role in
promoting inter-functional co-ordination in Saccos
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Managing for Shareholder Value
•Stakeholders
•Saccos can only really increase
wealth for their shareholders if
they produce outputs that meet
the needs of society
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Understand Your Value Proposition
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Drivers of business growth,
performance and strategic
positioning
11.30-1.30 am
Growth is why you are in business — to build or create something
bigger than yourselves. Because if you are not growing, you are
shrinking.
With that said, you don’t want to focus on growth for growth’s sake
because growth is just the means to an end. Your desire to grow must
match up with your vision for your organization. Rapid growth,
incremental growth, or maintaining your current position require
specific strategies.
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Growth begins with your
customers in mind.
Growth focuses on
opportunities.
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Natural Cause and Effect Logic
Needed to Deliver
Customer Unique Sets
Benefits of Benefits to Customers...
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Growth Strategies
Intensive growth strategies
• Exploit opportunity in the current market
Diversification strategies
• Exploit opportunities outside the current market/industry
Global strategies
• Exploit opportunities in the international arena
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Growth Strategy
using Ansoff Matrix
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Drivers of business growth
Leadership
•Ensures that everyone is enthused
and supported to work on the
strategy, improve processes, served
customers and active team players.
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Drivers of business growth
Strategy:
•Sets direction and give focus to
improvement. It must however be
deployed throughout the
organization to be effective
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Drivers of business growth
Customer
•From the outset, leading Saccos make
customers their focal point.
•They understand that by putting
customers’ needs and desires first, they can
achieve a competitive advantage.
Winning Companies Focus on Winning Customers
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Drivers of business growth
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Drivers of business growth
Operations
• Your operating model is the link between your strategic intent
and the ability of your organization to deliver on that intent.
• Having a clear approach that aligns your operations with your
strategy will increase your ability to achieve success.
• Growing business needs to develop an appropriate
infrastructure and keep adjusting that infrastructure as the
business grows.
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Drivers of business growth
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Drivers of business growth
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Drivers of business growth
Risk
• To succeed in today’s fast-moving climate, senior executives
must have a strategic approach to risk management.
Regardless of a company’s stage of growth, the ability to
identify and manage risk stands out as a vital element of
success.
• Corporations that wish to become market leaders should
not fear risk. They should approach it intelligently to reap its
rewards and accelerate their growth.
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The Key Drivers Of Loyalty
Fundamental questions
for Strategic Position:
Environment • What are the environmental
opportunities and threats?
• What are the organisation’s
strengths and weaknesses?
The • What is the basic purpose of
Capability Strategic Purpose the organisation?
Position
• How does culture shape
strategy?
Culture
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Strategic positioning
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Strategic positioning
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The Balancing Act:
Governance structure and
decision making Saccos
2.30-4.30 am
Corporate governance
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What do we mean by stakeholders?
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Independence Balance of Power
The Corporate Governance Triangle
BOARD OF DIRECTORS
MEDIATION
& CONFLICT
RESOLUTION *
INVESTMENT
INVESTOR RELATIONS
46 ©2004 Deloitte & Touche Tohmatsu 46
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Governance –Balancing Act
The people likely to have the biggest impact on value creation are managers
in charge of running the Saccos. Yet, there is a risk that they may not always
make decisions that have shareholders’ best interests at heart. They – like all
other market participants – can be governed by self-interest
As executive tenures get shorter and executive pay packets get bigger, it is
hardly surprising that some try to make their spell at the top as profitable as
possible.
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Governance –Balancing Act
Making sure the owners’ and managers’ interests are aligned entails
fostering open and honest communication and active interest from
shareholders
Recent events have shown that shareholders are making their views
known and are willing to get involved in companies they own
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Remuneration-Balancing Act
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Role Clarity
• The governing body should ensure that the
appointment of, and delegation to, management
contribute to role clarity and the effective exercise of
authority and responsibilities.
• Once each party understands precisely what its role
is, it becomes much easier to build a relationship
based on mutual respect, equality and a sense of real
teamwork, always with the focus on the long-term
interests of the organisation.
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Bridging the information gap
• While the executive team’s authority is derived from the governing
body, to which it must report, the executive team clearly has the
advantage in terms of institutional knowledge.
• Executives spend all their working hours, and then some, doing the
organisation’s work whereas the non-executive members spend in
less hours.
• Unscrupulous executives can control their governing bodies by
curating the information they receive; more usually, the information
in meeting packs is likely to reflect the unconscious bias of those who
compile it
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The conflict of interest faced by board directors
• Conflicts of interest abound at the board level.
• They constitute a significant issue in that they affect ethics by
distorting decision making and generating consequences that can
undermine the credibility of boards, organizations or even entire
economic systems.
• The boardroom is a dynamic place where struggles of ego, power,
rules, and authority continuously surface, and it is not always clear, in
the turmoil of group dynamics, what constitutes a conflict of interest
or the manner in which one should participate in board deliberations.
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The four tiers of conflict of interest faced by
board directors
Tier-I:
• Conflict is an actual or potential conflict between a board member and the Sacco.
Tier-II:
• Conflicts arise when a board member’s duty of loyalty to stakeholders or the Sacco is
compromised.
Tier-III:
• Conflict emerges when the interests of stakeholder groups are not appropriately balanced or
harmonized.
Tier-IV:
• Conflicts are those between a company and society and arise when a company acts in its own
interests at the expense of society.
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Tier-I conflict is an actual or potential conflict
between a board member and the Sacco
• A director or employees should not take advantage of his or her
position-Individual directors vs. Sacco.
• Act in the interest of the key stakeholders, whether owners or society
at large, and not in their own.
• Major conflicts of interest could include,
• Salaries and perks, misappropriation of company assets, self-dealing,
appropriating corporate opportunities, insider trading, and neglecting board
work
• All board members are expected to act ethically at all times, notify
promptly of any material facts or potential conflicts of interest and
take appropriate corrective action.
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Tier-II conflicts arise when a board member’s duty of
loyalty to stakeholders or the company is
compromised.
•This would happen when certain board
members exercise influence over the
others through compensation, favours, a
relationship, or psychological
manipulation.
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A tier-III conflict emerges when the interests of
stakeholder groups are not appropriately balanced or
harmonized.
• Face conflicts of interest between stakeholders
and the Sacco, between different stakeholder
groups, and within the same stakeholder group
• Board members have to address any conflicts
responsibly and balance the interests of all
individuals involved in a thoughtful, proactive
manner.
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Tier-IV conflicts are those between the Sacco and the
public and arise when a Sacco acts in its own interests at
the expense of society
• The doctrine of maximizing profitability may be
used as justification for deceiving customers,
polluting the environment, evading taxes, squeezing
suppliers, and treating employees as commodities.
• When Sacco’s purpose is in conflict with the
interests of society, board members need to take an
ethical stand, exercise care, and make sensible
decisions.
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How Directors get into trouble (1 of 2)
• The most frequent causes of trouble for Directors are incompetence and
dishonesty. More money, resources and opportunities are lost through
incompetence than through criminal wrong doing.
• When they allow themselves to be drawn into unfortunate situations. Eg.
Joining Boards they don’t know too well.
• When dishonest (stealing, lying etc.).
• When ignorant (lack of understanding their roles and responsibilities as
well as the organization they lead).
• When lacking independence (if a Director is very close to the CEO, they
may find it difficult to speak their mind).
• When there is conflict of interest (e.g. When a director profits or benefits
from a decision or action at the expense of the shareholders).
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How Directors get into trouble (2 of 2)
• When they fail to exercise the duty of care (Directors should
understand issues well and make the right decisions).
• Insider trading
• Poor business performance – hence the wrath of shareholders;
• Lack of Board leadership;
• Inadequate or inappropriate involvement in management;
• Entrenchment (high % of members remaining in the Board too long);
• Internal political or personal conflicts;
• Ineffective Board organization and process; and
• Conspiring in or tolerating legal violations.
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Balancing Act Solutions-Characteristics of good
corporate governance
Good Corporate Governance has seven distinguishing
characteristics, namely:
• Discipline
• Transparency
• Independence
• Accountability
• Responsibility
• Fairness
• Social Responsibility
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The head is the board, setting the objectives and deciding the best way to go. The four legs
are the company’s strategy, finances, organisation and its people. The horse will go as quickly
as the slowest leg allows. So if you concentrate everything on financial metrics and ignore
your people, then the horse will lag behind in the shareholder value stakes
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Questions
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