Disclosure: a short-cut to shareholder value
To deliver an uprated share price is to deliver shareholder value. And improved company reporting may be the quick way to deliver both.
To deliver an uprated share price is to deliver shareholder value. And improved company reporting may be the quick way to deliver both.
With much of the non-dot.com stock market currently in the doldrums, demonstrating that the board steers by shareholder value is becoming an increasingly important way of convincing investors that a company deserves an uprating. But this is a strenuous task, says Dominic Dodds of shareholder value consultant Marakon Associates, which has worked with companies such as Coca-Cola, BP, Lloyds TSB and Disney. He says that a shareholder value creation strategy has to be believed heart and soul by those at the top of an organisation if it is to have an impact on long-term performance.
Others do not believe that increasing the company share price need be so complicated. Research by MORI into the banking sector, which was carried out on behalf of the management consultancy arm of PricewaterhouseCoopers (PwC), seems to suggest that the key to a properly valued share price is clear communication, rather than a radical shift in management thinking – and some of the claimed benefits of greater disclosure are quite astonishing.
PwC’s Richard Barfield says: ‘Most banks, analysts and investors feel that more disclosure would increase share prices. Many investors do not view financial reports as useful for communicating true value and there are significant gaps between the information banks give and what the market wants.’
Just now, the banks tend to believe their shares are under valued; yet, at the same time, they see themselves as significantly better at disclosure than analysts and investors do. Are those two facts by any chance related?
The PwC findings are borne out by Dr Edgar Low of Deutsche Bank. Speaking before the announcement of the merger with Dresdner Bank, he said that the increased interest in shareholder value in continental Europe has been driven by two factors:
Back in 1996, Deutsche Bank recognised that it had to abandon the traditional shibboleths of European companies such as the formation and writing back of hidden reserves and the use of financial reporting to hide weaknesses. In the 1996 annual report the board wrote: ‘Deutsche Bank can no longer be managed as it was. We opted for a divisional organisation that is both client and product driven, and vested those four divisions with operational responsibility.’
Dr Low also said that the move towards introducing shareholder value presupposes a change in a company’s overall behaviour. He said: ‘We have to have a commitment to total transparency and global comparability. There has to be an open communication policy, which includes the disclosure of corporate strategy, the monitoring and reporting of performance, and an intensification of investor relations activities.’
For companies that take shareholder value creation beyond improved communications, a deeper strategy is required. According to Dodd, the chief executives who have outperformed the market over 10 to 15 years are obsessed with shareholder value and have a number of characteristics in common:
Of course, all this makes it easy to see why, if disclosure is a panacea for under-valued shares, companies might just choose that route instead of a full commitment to managing by shareholder value.
Return the Financial Director website
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