Tuesday, September 16, 2008

Shareholder Value

I was just reading a question on Linked In, the business networking web site, about how to use the Balanced Scorecard method in business. One of the answers talked about “Shareholder Value” and it started me thinking.

Focusing on shareholder value has caused far to many American companies to loose sight of their real business. To paraphrase Warren Buffet “Take care of your product and your shareholder value will take care of itself”.

If you build a quality product, in a cost effective manner, and market it well, then shareholder value is an automatic byproduct. The more you focus on shareholder value as a goal, the less you focus on the product and the product drives your business.

For most businesses shareholder value is measured by stock price and If you manage your business to control your stock price, then your business is your stock price. If you manage your business to produce (and sell) your product, then your business is producing (and selling) your product.

One reason far too many companies focus on stock price is that the stock price and not product sales has become the measure of the senior manager’s success or failure. It’s the kind of thinking that causes Apple to beat all the analyst’s expectations and still have their stock shares loose $17.47, or 10.5 percent in after-hours trading.

Yes, earnings are down from last year, but with over a billion dollars in profit this year, Apple looks they they are making money when a lot of businesses aren’t. So anyone in the real world would say that Apple is successful and that if the market is rational then their stock should be valued to reflect success and their stock price should hold or rise while only failure would drive falling stock prices.

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