International Business: Shareholder Value - Essay Example

International Business: Shareholder Value Considerably, shareholder value can be termed as the driving force of all international business that is successful in the 21st century. In the recent past, the maximization of shareholder value has indisputably become an overriding economic creed that carries an enormous impact on the entire management performance. Shareholder value is a concept used in business to imply the value that a shareholder enjoys by having a certain number of shares in a specific company. Other scholars define it as the value that the company delivers to the shareholder for being part of the company. The benefit referred herein might include capital gain, payments of dividends to the shareholder and other payout that the company decides to make to every single shareholder. Shareholder value is created when firms are expected to create a higher rate of return than it would be expected in a normal situation (Stout, 2012, p. 11). From a business perspective, the principles involved in the management of shareholder value are not complex. To begin with, it is critical to ensure that the firm provides lasting economic returns that are above all forms of new capital that the firms effects. In addition, the companies can endeavor to increase earned returns by the capital that has been in place for a long period. To realize these objectives, a firm must put in place three basic factors. First, the firm should seek to grow a healthy business by ensuring that the returns are high. Second, through its management, the company should shrink or put to an end and if possible try to fix all unhealthy business undertakings that have proved to build returns that are lower than the cost of capital. Lastly, the firm can opt returning cash to the investors of the business by allocating dividends. Consequently, this can involve stock buybacks in instances when the firm has more cash on hand the opportunities that are available and that which can be profitable and help in business growth (Stout, 2012, p 17). Through this, it will be possible for the firm to put to maximum short-term returns at long term sustainability’s expense. Eventually, these issues involve rewarding owners (shareholders) at the estranging expense of other stakeholders like customers and employees hence encourage more investors. Arguably, therefore, shareholder value plays a critical role as it contributes significantly to the management of the company hence promoting international business. It thus means that the management should have the shareholders in mind during their decision making process as the more the shareholder value, the better it is for the management and the firm at large (Keay, 2012, p. 13). Increasing shareholder value should be initiated by increased earnings or profits thus the decision making process by management is vital. Capital market is a global phenomenon, hence investors can shift their investments to better yielding companies, that are foreign and that create better business opportunities. It is for the reason that shareholder value remains critical to international business enterprises. In addition, the current shift evident in corporate governance has brought about a demand for accountability by business owners from corporate executives. Management team thus seeks to justify for increased shareholder value as a way of encouraging existing and potential investors. Additionally, to the international business, shareholder value plays a critical role as it acts as an encouragement for the investors to stay with the company. This thus means that the company will continue to undertake business and hence play critically in promoting economic development. Further still, if there has been a positive growth in shareholder value, new investors will be attracted (Stout, 2012, p. 17). This in turn means that the international business will have better chances of growing money. From another perspective, shareholder value is a tool that makes it possible for managers to grow a granular view, in which the strategies, resources, and activities put forth help add value to it. Through this tool, it is possible for managers to access the success of the company as it aids in computation of cash-based metrics like cash flow returns on investment and economic profits (Keay, 2012, p. 24). In the long run, it helps in drawing a comparison of the individual performance with other business across the globe and understands the market position presently. Through these metrics, the discipline of every single business has been promoted since the allocation of capital by managements taking a critical decision making process. It helps in carrying careful evaluation on of potential investments against the possible option of returning cash to investors through dividends (Stout, 2012, p. 29). Management of long-term shareholder value helps the management teams to perceive the firm’s owners as a resource to influence instead of thinking of them as an audience to spin. Since the firm’s value is future-oriented in nature, carrying fundamental performance assure the shareholders of their being in business in the future. When an international firm maintains a high shareholder value, their competition in the market is boosted as many potential shareholders will be interested in buying to share of the firm. In so doing, the success of the single firm is guaranteed as it means the worth of the business has been maximized. In recapitulation, as the theory of Economic Value Added presents, every firm’s primary goal is to ensure that the wealth of all shareholders are maximized (De Villiers, 288), which should be a given because it is from these shareholders that own the firm and any investor who is in their right senses have a high expectation of good returns from every single investment they make. Despite the fact than economists and business analysts might argue that overconcentration on monetary value of a firm could turn detrimental to other firm’s stakeholders, like the internal and external environments as well as labor, it is possible to create a stronger case that strengthening of stakeholders position in any business is promoted highly and more evident in companies that try to manage value in an active manner (Keay, 2012, p. 47). Regardless of this, it is critical to note that shareholders are part of stakeholders and the central and most vital. For their part, they expect management to generate a value that is notably over and above the cost that have been incurred in purchase of resources consumed as well as the cost of using capital. Bibliography De Villiers J. 1997. "The distortions in Economic Value Added". Journal of Economics and Business. Volume 49, numb 3 May/June 1997, P.285-300 Stout, L. A. (2012). The shareholder value myth: how putting shareholders first harms investors, corporations, and the public. San Francisco, Berrett-Koehler. Keay, A. (2012). The Enlightened Shareholder Value Principle and Corporate Governance. London: Routledge. Read More