Shareholder Value Creation: A Strategic Financial Goal

Indra Pandey

No WP1998-04-02, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: Recently some corporate managers in India have started emphasising the need of the shareholder value creation (SVC). A few of them have explicitly stated SVC as their most important goal. Companies such as the Hindustan Lever Limited, Infosys or Balrampur Chini have reported information on the economic value added (EVA) – considered to be equivalent to SVC – in their annual reports. HLL has implemented the system of subjecting their investments, business performance and planning EVA evaluation. In this paper we argue that EVA used by HLL is not same as SVC. The focus on SVC is expected to increase in India as the capital markets are maturing, shareholders are assuming greater power, investment regulations are being oriented towards shareholders and the threat of mergers and take-overs is increasing. The traditional financial goals pursued by companies have flaws since they are based on accounting numbers, and do not necessarily lead to value creation. If corporate management is an agent of shareholders, then they should accord highest priority to the shareholder value creation. On the basis of the available theoretical literature, we show how SVC works. SVC has the potential of being a strategic goal not only in project and business evaluation but in the overall strategic planning.

Date: 1998-04-02
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