Building and Communicating Shareholder Value was commissioned by Business Intelligence as part of its ongoing research programme into the latest developments and best practice thinking within the arena of business performance management and measurement.

This report reveals how exemplary organizations are striving to deliver superior value to their shareholders - be they publicly traded enterprizes or privately financed - with a major focus on delivering enhanced shareholder wealth through value-based management frameworks such as Stern Stewart’s Economic Value Added (EVA®). Other approaches, such as the balanced scorecard, are also considered as alternative systems for creating shareholder value.

Crucially, the report explains the importance of communicating the significance of value-based approaches - both internally to employees and externally to the investment community.

Chapter 1: Introduction

This Chapter provides the background to why shareholder value creation has become the primary focus for organizations’ senior management teams. It explains how company leaders are under increasing pressure to deliver enhanced value from institutional investors who, in turn, are pressurized by their clients to deliver value.

Importantly, the Chapter explains why an increasing number of practitioners and advisors alike are finding conventional accounting metrics insufficient for explaining shareholder value creation and for assessing underlying corporate performance. This Chapter also provides an overview of the key learning points to be gained from the Report.

A case study on Electrolux demonstrates best practice.

Chapter 2: Building and Communicating Shareholder Value — A Research Survey into Present Trends and Practice

Based on the findings from an exclusively commissioned survey to support this Report, this Chapter provides details on whether organizations are indeed deploying value-based approaches to shareholder value creation and their perceived levels of success with such systems.

Specific topics covered include: how companies view the changing pressures to deliver shareholder value, the efficacy of value-based management approaches, corporate performance management frameworks and value creation, communicating value creation and shareholder value, future threats and opportunities.

A case study on survey respondent Hallco 1812 demonstrates best practice.

Chapter 3: Value-based Management Techniques Explained

This Chapter provides a detailed outline of the main value-based approaches covered within the Report. It explains the key elements of Stern Stewart’s EVA, HOLT Value Associates' Cash Flow Return on Investment (CFROI), and Total Shareholder Return (TSR). Based on practitioner and advisor comments the Chapter explores the perceived strengths and weaknesses of each approach.

Crucially, the Chapter explains why many of the interviewees for this Report stress the superiority of economic performance reporting over conventional accounting-based systems.

A case study on Unilever demonstrates best practice.

Chapter 4: ‘Balanced’ Value Creating Approaches

Chapter 4 explores approaches to shareholder value creation other than value-based frameworks. It explains why many practitioners and advisors believe that shareholder value is more effectively built through the use of strategic implementation frameworks, such as the balanced scorecard, or though systems that focus on building organizational intellectual capital.

The Chapter also explores the debate over whether taking a primarily shareholder or wider stakeholder approach is more successful in delivering ultimate shareholder benefits.

Case Studies on Nova Scotia Power Inc (NSPI) and Clarica demonstrate best practice in implementing the balanced scorecard and using an intellectual capital framework respectively.

Chapter 5: Value-based Decision-making

This Chapter details how to make a value-based approach central to the day-to-day decision-making of management. It explains the process by which managers are taught to take a value-based approach and why such an approach has to be central to strategic planning and budgetary processes.

The Chapter also details the key performance levers that managers must pull in order to create sustainable shareholder value and the importance of using value-based methodologies in merger and acquisition (M&A) activities. Also explained is the crucial importance of using real options in considering the likelihood of future value creation.

A case study on Manitowoc demonstrates best practice.

Chapter 6: Implementing and Communicating Value-based Management Deep within an Organization

Chapter 6 explains the importance of instilling a value-based mindset throughout the general-employee level. It explains that by doing so organizations will reap the full benefits of a value-based methodology.

The Chapter explains the absolute importance of creating a corporate culture conducive to value-based working and how organizations have overcome the significant obstacles of culture change. Also explained is the importance of training and education programmes to explain how employees can use value-based thinking to drive continuous improvement, and the need for robust internal communication mechanisms to continually reinforce the goals of a value-based system.

A case study on Herman Miller demonstrates best practice.

Chapter 7: Compensation and Shareholder Value

This Chapter explains why using aligned incentive-compensation systems are critical to succeeding with a value-based approach. As the Chapter explains, linking compensation with value created is the most effective way to make managers and employees think and act like company owners.

The Chapter explains innovative approaches, such as Stern Stewart’s incentive-compensation bonus bank, and more conventional systems, such as Employee Share Option Programmes (ESOPs).

The Chapter also explains the shortcomings of traditional incentive systems such as paying bonuses for performance against budget. In addition, it explores the ongoing debate on how to best tie senior management compensation with shareholder wealth creation.

A case study on Sirona demonstrates best practice.

Chapter 8: Communicating Value Creation to Shareholders and Wider Stakeholder Groups

Chapter 8 explains how organizations are communicating value-based approaches and results to the investment community and whether investors are indeed eager to receive such information.

The Chapter outlines what drives investors’ investment decisions and whether organizations are presently aligning their communication systems with investor requirements.

It also looks at the importance of the Annual Report as a communication vehicle and whether organizations should proactively communicate value-creation goals to wider stakeholder groups.

A case study on The Co-operative Bank demonstrates best practice.

Chapter 9: Implications of the New Economy and Conclusion

The concluding Chapter is split into two parts. The first part considers the implications of the ‘new economy’ on a range of operational and investment decisions.

It explains why so much investment capital has been ploughed into dot.com companies and what this means for traditional approaches to investment decisions. The Chapter also explains the importance of real options in making investment choices and, importantly, the implication of the e-world on so-called ‘old economy’ organizations.

The Chapter will also look at why assessing the performance of new economy companies makes more sense when taking an economic rather than conventional accounting-based approach.

Based on the findings from this Report, part two of this Chapter provides a check-list of the critical success factors for succeeding with a value-based approach.

A case study on Wannago demonstrates best practice.