HARVARD BUSINESS REVIEW

ROLL NO:

TPS MAJOR FINANCE

TOTAL NUMBER OF SLIDES -28.

CEO-BERKSHIRE HATHAWAY.

 I am a better business man because I am an investor and a better investor because I am a business man.

Ten ways to create shareholder value

4

AUTHOR-ALFRED RAPPAPORT
Alfred Rappaport (16 June 1868 11 October 1946) was an Austrian diplomat and writer. Rappaport was considered an authority on Balkans and Albanian affairs in the foreign ministry of AustriaHungary. For his services he was ennobled by Franz Joseph I in 1916 and became known as Alfred Rappaport,. After the fall of the Austro-Hungarian Empire he retired and focused on publishing his works on the Balkans .

1)DO NOT MANAGE EARNINGS OR PROVIDE EARNINGS GUIDANCE

 Information that a company provides as an indication or estimate of its future earnings. Guidance is an "expected results" issue from a company to shareholders and market watchers as to how they envision a future period turning out. Such guidance will typically include revenue estimates, along with earnings, margins and capital spending estimates. Also known as "earnings guidance . Majority of corporate companies are decreasing value creating spending on research and development ,advertising,maintainance and in order to meet earnings benchmarks.

 Organizations compromise value when they invest at rates below the cost of capital or forgo investment in value creating opportunities in an attempt to boost up short term earnings. A 2006 national investor relations institute found that 66% of 654 surveyed companies provide regular profit guidance to wall street analysts. So the companies should focus on value creating activities rather than to focus on short term earnings .

2)MAKE STRATEGIC DECISIONS THAT MAXIMIZE EXPECTED VALUE EVEN AT THE EXPENSE OF LOWERING NEAR TERM EARNINGS .

A sound strategic analysis by a companies operating units should produce informed responses to three questions How do alternative strategies affect value Which strategy is most likely to create greatest value

For selected strategy how sensitive is the value of the most likely scenario to potential shifts in competitive dynamics and assumptions about technology life cycles, the regulatory environment and other relevant variables?

10

3)MAKE ACQUISITIONS THAT MAXIMIZE EXPECTED VALUE EVEN AT THE EXPENSE OF LOWERING NEAR TERM EARNINGS

11

 Companies typically create most of their value through day to day operations, but a major acquisition can create or destroy value faster than any other corporate activity. With record level of cash and relatively low debt levels companies increasingly use mergers and acquisitions to improve their competitive positions M&A announcements world wide exceeded $2.7 trillions in 2005. Sound decisions about M&A deals are based on their prospects for creating value, not on their immediate eps impact.

12

4)CARRY ONLY ASSETS THAT MAXIMIZE VALUE

13

 Corporate companies must focus on activities that contribute most to the long term value such as research and strategic hiring and outsourcing lower value activities such as manufacturing Value oriented companies regularly monitor whether there are buyers willing to pay a meaningful premium over the estimated cash flow to the company for its business units brands and other detachable assets. Failure to exploit such opportunities can seriously compromise share holder value. For example, dell computers invests extensively in marketing and telephone sales while minimizing its investments in distribution, manufacturing and inventory carrying facilities .

14

5)REWARD CEO'S AND OTHER SENIOR EXECUTIVES FOR DELIVERING SUPERIOR LONG TERM RETURNS

15

 Companies need effective pay incentives at every level to maximize the potential for superior returns. Standard stock options diminish long term motivation, since many executives cash out early. Instead use discounted indexed options. these options reward executives only if stocks outperform a stock index of company s peers ,not simply because the market as a whole is rising.

16

6)REWARD OPERATING UNIT EXECUTIVES FOR ADDING SUPERIOR MULTIYEAR VALUE

17

 Companies typically have both annual and long-term incentive plans that reward operating executives for exceeding goals for financial metrics such as revenue and operating income and for sometimes non-financial targets as well. The trouble is that linking the bonuses to the budgeting process induces the managers to low ball performance Instead of linking the bonuses to budgets, develop metrics that capture the share holder value, created by the operating unit. And extend the performance evaluation period to at least a rolling three year cycle

18

7)REWARD MIDDLE MANAGERS AND FRONTLINE EMPLOYEES FOR DELIVERING SUPERIOR PERFORMANCE ON KEY VALUE DRIVERS THAT THEY INFLUENCE DIRECTLY
.

19

 For more specific measures ,companies can develop leading indicators of value, which are quantifiable, easily communicated current accomplishments that front line employees can influence directly and that significantly affect the long term value of a business in a positive way.

Focus on three to five leading value based metrics such as time to market for new product launches ,employee turnover, customer retention and timely opening of new stores

20

8)RETURN CASH TO SHARE HOLDERS WHEN THERE ARE NO CREDIBLE VALUE CREATING OPPORTUNITIES TO INVEST IN THE BUSINESS

21

 Value conscious companies with large amount of excess cash and only limited value creating investment opportunities return the money to share holders through dividends and share buybacks. Not only does this give shareholders a chance to earn better returns else where but it also reduces risk that the management will use excess cash to make value destroying investments in particular ill advised ,over priced acquisitions .

22

9)REQUIRE SENIOR EXECUTIVES TO BEAR THE RISKS OF OWNERSHIP JUST AS SHAREHOLDERS DO

23

 For the most part ,option grants have not successfully aligned the long term interests of senior executives and shareholders because the former routinely cash out vested options.th ability to sell shares early may infact motivate them to focus on near term earnings results rather than on long term value in order to boost the current market price. To better align these interests, many companies have adopted stock ownership guidelines for senior management. Minimum ownership is usually expressed as multiple of base salary, which is then converted in to a specified number of shares.

24

10)PROVIDE INVESTORS WITH VALUE RELEVANT INFORMATION.

25

 The final principle governs investor communications such as company s financial reports. Better disclosure not only offers an antidote to short term earnings obsession but also serves to lessen investor uncertainty and so potentially reduce the cost of capital and increase the share price .

Companies must prepare corporate performance statement that allows analysts and shareholders to readily understand the key performance indicators that drive your company's long term value.

26

CONCLUSION
Companies 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 on developing new ones for the long term. For most organizations value creating growth is the strategic challenge and to succeed, companies must be good at developing new,potentially disruptive businesses

26

28