Shareholder value creation

Shareholder value creation is the key to success in current market. There is increasing pressure on corporate executives to measure, manage and report the creation of shareholder value on a regular basis. And corporate executives are under increasing pressure to demonstrate on a regular basis that they are creating shareholder value. This pressure has led to an emergence of a variety of measures that claim to quantify value-creating performance. Moreover, creating value for shareholders is now a widely accepted corporate objective. Delivering shareholder value is not about this year’s profit or this year’s dividend, it is a much more important, long-term issue than that (Marsden, 2003).

The company's goal is to maximize shareholder value that is the core responsibility of senior management. The establishment of stock-based compensation mechanism to motivate senior managers to create shareholder value will be granted to managers to focus on the behavior of the long-term value. The aim stressed to senior managers and shareholders should bear the same risk. A considerable part of the top managerial compensation reflected the form of stocks, their salary in relation the performance of stock and the interests of investors, which is leading to senior management focus on long-term shareholder value. So as to achieve the effect of incentives, and other senior management salary system must be established on the basis of the evaluation system of the company a set of key performance indicators, and the assessment and salary system consistent with the strategic objectives of the company as a whole, so that it can guarantee to bring the pay incentive effects the maximization of shareholder value.

In addition, the high growth in profits does not mean that high growth in shareholder value. The markets tend to choose the profit high-growth industries and companies as long-term investment objectives, and given too much attention to the profit growth rate in practice.

Looking at the example, in 2000, a large energy company Enron suddenly collapse. Since the company's internal serious economic crisis, the managers in order to enable companies to quickly improve the company's stock price, there are financing a lot of money to solve the current difficulties of the company. Enron's use of a variety of subsidiaries and affiliates complex structure, the implementation of the multi-layer holding, so it can control a lot of companies with very little capital to achieve rapid expansion. At the same time, the hidden debt, tax evasion, artificially manipulate profits. But these acts are illegal.

It can therefore be seen the top of corporate managers evaluate their performance in terms are play vital role of generating shareholder value. The Enron Company’s senior management is not in the correct manner to deal with problems, but through deception, concealing and other illegal activities, thus leading to the company's bankruptcy and shareholder value worthless.

In addition, the failure of RBS – the biggest bail-out of the financial crisis – cost UK taxpayers £45bn in equity injections alone. The FT report is damning of RBS and its former management, led by Sir Fred Goodwin, the vilified former chief executive, and Johnny Cameron, former head of the investment banking division. There were “underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions”, the report said.

The analysts believe that the Royal Bank of Scotland this expansionist policy pursued by the annual huge loss partly due to the former chief executive Fred Goodwin. The strategic decision of the company executives to make the acquisition of decision-making and asset selection decisions should be based on the company is expected to maximize shareholder value criteria. If there are no good investment opportunities and the form of dividends and repurchase shares to return cash to shareholders. As result of this to emphasize the shareholder value is necessary contact to the performance of the company's senior management.