The generation of shareholder value lies at the heart of strategically integrated thinking. When it comes to maximizing or destroying shareholder value, the margin for error is relatively thin. As a result, it is critical to pose specific questions for clarity of our knowledge of what generates value for shareholders, what management can do to influence corporate value, and what role accountancy and finances play in creating value, particularly during the Covid19 epidemic. (week 2)
The management of value theory is an essential aspect of value generation. According to experts, value-Based Management (VBM) recognizes which financial possibilities produce and degrade matter, resulting in superior managerial decisions (Mavropulo et al., 2021). Three main concepts are involved in quality management. Leadership, economics, and organizational structure are the three roles that a financial manager must have in order to not only support but also generate value. Amazon is an excellent illustration of this since it has addressed all three components of creating value for stakeholders. Furthermore, financial managers must determine how much money has been committed, what average return shareholders will obtain, and if this rate of return is sufficient in light of expenses. Earnings per share (EPS) and Return on Capital Employed (ROCE) will be regarded. (week 2)
However, because they have the ability to be altered in order to provide favorable results for shareholders, we will examine some of the concerns related to these crucial indicators of value. A variety of factors, including investor sentiment in depreciating strategies, accounting practices pertaining to goodwill accountancy, and the handling of extraordinary items and allowances, can all contribute to this issue. Furthermore, both EPS and ROCE disregard sacrificed investments, which are put in working capital and inventory, which are difficult to convert and likely to raise debt (Ali et al., 2017). Additionally, neglecting danger in favor of a higher cash figure and failing to realize the worth of time might be discovered. Financial responsibility theory consists of making ethical judgments to the most significant advantage of achieving the organization’s ultimate goal. Wells Fargo’s purchase of Wachovia Bank in 2008 exemplifies this concept nicely; Wells Fargo’s aggressive aims led to illegal bank activities by bank workers. As a result, lousy decision-making clearly lowers profits for investors and businesses. (week 2)
Consider the production of wealth through shareholder wealth against maximizing profits. It is critical for an organization to determine whether to pursue short-term profits via profit maximization or long-term gains through wealth maximization (Sammaknejad et al., 2019). Profitability is connected with a high level of risk. Consider business ‘A’ to be a volatile firm with a hazardous approach that loses and earns money in the near term, and company ‘B’ to be a reliable corporation with a more uncomplicated technique that is centered on long-term gains. If both firms earned precisely the exact profits over a particular length of time and were valued on the Stock Exchange, the steady company would be priced higher because its shares would be in more demand than the unpredictable company providing value for owners. As a result, risk-taking mindsets are also required while producing value. (week 2)
Thus, value creation is typically achieved by making a series of informed business decisions based on sound business intelligence. Mergers and acquisitions, in my opinion, can play a central role for large companies. However, the driving force behind value creation is the development of new directions and revolutionary solutions and approaches. After studying, I concluded that the more successful a company improves its financial well-being, the more opportunities it provides to empower local communities and positively impact the environment. (week 2)
References
Ali, M. A., Kalim, U., Raza, H., Ali, H. A., Rehman, M., & Ullah, M. I. (2017). The Relationship Between ROA, ROE, ROCE, and EPS Ratios with Break-up Values of Shares of Karachi-Pakistan Fuel and Energy Listed Companies. Journal of Finance and Accounting, 5(3), 115-122. Web.
Mavropulo, O., Rapp, M. S., & Udoieva, I. A. (2021). Value-based management control systems and the dynamics of working capital: Empirical evidence. Management Accounting Research, 52, 100740. Web.
Sammaknejad, N., Zhao, Y., & Huang, B. (2019). A review of the expectation-maximization algorithm in data-driven process identification. Journal of process control, 73, 123-136. Web.