Creating Shareholder Value: A Guide for Managers and Investors

For the past 12 years, `The Wall Street Journal' has published Dr. Alfred Rappaport's brainchild, the `Shareholder Scoreboard.' This special section lists 1,000 of the largest U.S. corporations (representing 90% of all listed equity values) and shows statistically how "shareholder-friendly" each one is. This journalistic feature popularizes Rappaport's "Shareholder Value" (SV) theory among institutional and individual investors. Investors use this theory to make equity commitments that reflect the author's economics-based criteria. Frankly, the lay reader who has not majored in economics, or in corporate accounting and finance, will find Rappaport's book abstruse. But it leads the way for the informed, inquisitive investor who seeks "business enlightenment" and Wall Street success. Do not be thrown off by the original 1986 print date. A classic is just that, a book that can be read and wisely used for decades. The small, silent shareholder revolution that Rappaport started is far from over. By now, shareholder analysis has become part of the mainstream for hundreds of big companies (though they accepted it gradually). SV is far from perfect as a corporate strategy indicator. The true worth of this book for CEOs and other executives resides in its lessons for implementing the SV approach throughout a corporation. We recommend it to all three informed constituencies of every public corporation: executives, employees and shareholders.

Given that investors value bonds by discounting future cash flows, it stands to reason that they value stocks in the same fashion. Alfred Rappaport is the founder of the shareholder value mindset which gained importance in the '80 and is widely accepted in this new millenium. Rappaport starts the book explaining that objections to using a discounted Cash Flow model do not hold. Strong arguments and empirical evidence is given to explain the market's valuation mechanism. What follows is a basic but thorough explanation of the 3 elements for valuing a company (cash flows , risk and the competitive advantage period). In the second part of the book, it will become clear for the reader DCF is closely linked to strategic analysis and is not in contradiction with stakeholder analysis, customer value analysis, Activity Based costing or any other tool. On the contrary, Rappaport shows DCF is a communication tool that helps investors understand a company's implied performance and how to (re)act. Together with the Valuation book from Copeland, Koller and Murrin this is the book you need.

This book covers: investment and the meaning of shareholder value; unjustified conflict between gaining competitive advantage and creating shareholder value; short-comings of accounting; approaches to calculating shareholder value; business strategy; stock market signals to management; and executive performance. Rappaport stresses the unity of goals between shareholder and stakeholders. An excellent and insightful book.

Rappaport's book is an informative resource for any financial manager. I now understand why Rappaport is credited with the SVA methodology. His explanation is thorough and clear, cutting through the fluff normally associated with forecasting and evaluating a business.

Easy-to-read, informative for CEOs, CFOs, management and Boards of Directors interested in creating shareholder value.