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Financial Directions – Managing value: a bear necessity

In its Managing for Shareholder Value survey 2002, PA Consulting asked 300 CEOs, chairmen and FDs of listed companies around the world about the extent to which they measure business performance based on value creation rather than accounting measures. PA then compared this against companies? total shareholder return (TSR).

Overall results show a positive correlation between the use of MSV and increased TSR. On average, companies employing full MSV exhibit annualised TSR of 8.7% over five years, compared with 6.2% for companies that ?were positive both to principles and processes, but not questions related to actions?. The figure is 1.9% for companies positive about principles, but not their processes or actions, and 1.7% for companies that exhibit no MSV in practice.

In bear markets, companies that do not manage shareholder value perform even worse, with net shareholder returns of -6.2%. The survey reveals that only companies with full MSV programmes create value during a bear market.

The percentage of senior executives in listed companies who strongly agree that MSV is a priority for their business has increased from 50% in 2001 to 65% in 2002. Only 6% of respondents are either neutral or disagree that MSV is important.While 66% of respondents had some form of principles-based approach to MSV in their organisations, 50% implement shareholder value-based processes and only 20% translate MSV into definite actions ? such as paying a proportion of staff bonuses in shares, taking all business decisions on the basis of maximising shareholder value and targeting growth in areas with the highest returns on equity. These last companies are the ?hard core group of companies that are really serious about MSV,? according to PA. The number of companies operating full action-based MSV has doubled since 2001.

The survey finds that companies which defer part of their bonus pay-out over several years exhibit a strong positive correlation with TSR, on average growing shareholder returns by an additional 2% a year. Despite this, PA finds that most companies are unhappy to implement a deferred bonus system.

Companies which encourage staff to build up shareholdings in their company also create an additional 3% TSR a year.

The MSV practices with the greatest positive impact on TSR that, according to PA, are being missed by many businesses include: communicating value creation externally and in detail rather than focusing on earnings per share only (2% TSR uplift); performance reviews based on value rather than accounting measures such as operating profit (3% uplift); creating reporting processes based on value created by product and customer (2% uplift); and rewarding performance rather than giving bonuses linked to budgets (3% uplift).

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