Lasting Shared Value: A Case Study

Introduction Running a company is far from easy, especially guaranteeing its long-term growth potential. Plenty of firms, like Lernout & Hauspie and WorldCom, failed to manage a healthy company. This paper aims to investigate the creation of lasting shareholder value. The first section will provide some necessary information about the problem of running a company purely on the intend of serving the interests of the shareholders. In the second part we will introduce two game changing theories on this topic, by three leading economists. The final section of the paper will combine the main ideas of both theories into a final conclusion on how to create lasting shareholder value. The problem of focussing on short-term performance It has become

2.1.3 Combining the two approaches Both ways of running a business have their limitations. By following the type E approach, it is hard to create a sustainable competitive advantage because of the focus on short-term results. Using the type O approach makes it hard to significantly increase the economic value of a company. Expanding the shareholder value whilst creating a transparent and reliable culture is very difficult . However, because of the difficulty, the chance of having a sustainable competitive advantage will be much higher. Combining both theories comes down to doing the following things which Beer and Nohria mentioned in the Harvard Business Review article ‘Cracking the Code of Change’:

Set direction from the top and engage people below. focus simultaneously on the structure and systems of the organization and on the corporate culture.

Apply theory E incentives in an O way. Employees’ high involvement is encouraged to develop their flexibility, and variable pay is used to reward that

Make strategic decisions that maximize expected value, even at the expense of lowering near-term earnings.

Make acquisitions that maximize expected value, even at the expense of lowering near-term earnings.

Carry only assets that maximize value. Companies should regularly monitor whether there are buyers willing to pay a meaningful premium over the estimated cash flow value for its detachable assets. The organization should focus on its core business in which it has a comparative advantage.

Return cash to shareholders when there are no credible value-creating opportunities to invest in.

Reward senior executives and unit-executives for adding superior multi-year value. Standard options is an imperfect vehicle for motivating long-term value creation. Executives should only be rewarded if the company’s shares outperform the index of the company’s competitors.

Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly. For example the timely opening of new stores or manufacturing