Understanding Shareholder Value

Understanding
Shareholder Value

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Summary
Shareholder Value techniques have long been a standard for
corporate performance analysis, with applications for capital
budgeting, acquisition analysis, corporate portfolio management and
strategic financial planning.
The Key Value Drivers, the elements of the Shareholder Value
equation, link IT investment strategy to business objectives and stock
price. They provide a common framework that can be shared by IT,
Finance and the user community to measure IT investment in terms
of long-term value creation.

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Objectives:
N Present the Shareholder Value Framework
N Link IT investment strategy to business objectives
and stock price
N Evaluate IT investment’s contribution to your
company's value
N Communicate IT investment strategy to the
financial and user community

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Management's Main Job
N Deploy assets to create the
greatest expected return to
shareholders
N Widely held view
N Is it art or science?
N How do you measure it?
N How do you achieve it?

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Widely Held View
N Rappaport: Alcar Group
N Stern: Stern Stewart
N Copeland: McKinsey
N Kaplan and Norton: Balanced Scorecard
Collaborative
N Siebel
N many others

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What About Other Stakeholders?
N Shareholder Value is NOT in conflict with
the interests of other stakeholders...
IT SUPPORTS THEM!
–
Copeland, Koller, Murrin
–
Kaplan and Norton

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SV is an End-of-Process Measure
“Creating
shareholder value
is the outcome that
every strategy
seeks to
accomplish.”
Kaplan and Norton

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Is it Art or Science?
N Part Science
– Valuation techniques
– Data management
– Marketing/technology research
– Financial engineering
– Management, strategy and planning
N Part Art
– Reliability of forecasts
– Communication skills
– Management, strategy and planning

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How Do You Measure It?
N Shareholder value is measured by
discounted cash flow (DCF)
N Avoids weaknesses of accounting earnings
N Incorporates risk
N Incorporates the time value of money
N Better than other measures (ROI, TCO,
payback, CF ROI, EPS, etc.)

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The Value Drivers:
Disaggregating DCF
N Quantitative first level of in-process
financial measurement
N Tie stock price to the company’s financial
statements
N Tie financial statements and non-financial
in-process measures (e.g.balanced
scorecard) and individual project results

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