Shareholder value accounting

In Europe, calls for increased disclosure got a boost in 2001 when the Association of British Insurers (ABI), a 400-member trade association of Britain s insurance industry, issued new guidelines. The ABI members account for more than 20 percent of stockmarket investment in London. These guidelines ask companies to disclose information about the social, environmental, and ethical risks and opportunities they face and how they plan to handle them. ABI officials say the guidelines represent an important opportunity for investors and companies to work together both to protect shareholder value and improve their understanding of corporate social responsibility (see www.abi.org.uk). 

The literature on strategic planning (Hax and Majluf, 1984) has models that deal directly with shareholder value. They use different models (market to book values, profitability matrices, etc.) to obtain corporate market value, which take into account the company reinvestment policy, dividend payments, etc. One cannot help also mentioning some classic and highly mathematical models from game theory and other analytical approaches, some of which are discussed elegantly by Debreu (1959) and Danthine and Donaldson (2002). 

Managing the corporation in the context of the shareholder value framework means value oriented corporate governance and is conducted via accounting figures. The company s value can be computed as follows ... 

When speaking of value, there is, basically, a financial and a non-financial interpretation of that term (Moller Tdrrdnen, 2003 323 Walter et aL, 2001 45). The financial meaning is closely linked to shareholder value, which characterizes a concept solely orienting a company s activities towards an enhancement of the value of its shareholders. As a result, the market value of the employed equity capital will be maximized (Buhner, 1992 418). The interests of other stakeholders are taken into account insofar as they are a means of achieving that objective. For the measurement of value enhancement, a set of diverse business metrics is developed, for example the economic value added (EVA), the discounted cash flow (DCF) or the cash flow return on investment (CFROI). However, the development of the shareholder value approach is not yet complete (Beck, 2003 3). Thus, many forms of application and transfer can be found, such as a combination of SCM and the shareholder value approach. Singhal Hendricks (2002, 2008) hint at the necessity of managing a supply chain in terms of the principles of shareholder value. The same thoughts can be found in the publications of Laupper (2004), Losbichler Rothbock (2006) and Neher (2003), who all deal with the transfer of the ideas of shareholder value into the context of supply chains. Due to the one-sided concentration on financial metrics and the value enhancement for the benefit of the company s shareholders, the stakeholder value approach is opposed to shareholder value (Achleitner, 1985 73 Bischoff 1994 ... 

On the other hand, the shareholders, who see the value of their property diminishing rapidly, perceive rapid capital depreciation less favourably. Thus for investors a longterm depreciation is more desirable. On the other hand, the authorities could see very fast depreciation rate as an attempt to escape paying taxes. Therefore, the depreciation is subject of legal regulations, but also subject of political decisions. The accounting system has its procedures too. Shortly, depreciation is a complicated issue in practice. 

As shown in previous sections, the credit spread on a corporate bond takes into account its expected default loss. Structural approaches are based on the option pricing theory of Black Scholes and the value of debt depends on the value of the underlying asset. The determination of yield spread is based on the firm value in which the default risk is found as an option to the shareholders. Other models proposed by Black and Cox (1976), Longstaff and Schwartz (1995) and others try to overcome the limitation of the Merton s model, like the default event at maturity only and the inclusion of a default threshold. This class of models is also known as first passage models . 

More and more companies are realizing that embracing responsibilities toward customers, employees and the community, in addition to stockholders, enhances sustainability of companies. This is known as corporate social responsibility (CSR). Responsible companies are concerned with reconciling and aligning the needs and values of employees, customers, suppliers, communities, and shareholders. To ensure integrity the company must institute accountability and transparency in its supply chain activities. 

While value is based on cost from the point of view of the company accountant, the concept of value may have different interpretations outside the company. In section 2.4.3, we stated that value from the end-customer s point of view is the perceived benefit gained from a product/service compared with the cost of purchase. From the shareholder s point of view, value is determined by the best alternative use of a given investment. In other words, value is greatest where the return on investment is highest. 

As corrupt business and construction practices are the norm in some environments, students must learn not only that there are differences in what is considered acceptable practice they must also learn how to intellectually critique dubious ethical norms. We expect that exploration for and demonstration of universal and/or ubiquitous moral values will be an important component in international ethics education. One of the examples is the concept of Corporate Social Responsibility (CSR) (Baker 2004). CSR focuses on accountability of organizations to a broad group of stakeholders including employees, customers, suppliers, community organizations, subsidiaries and affiliates, joint venture partners, investors and shareholders. CSR policies are based on social justice principles, human rights, and environmental standards. CSR can make our science, engineering and management students better understand that we do not inherit the earth from our ancestors we borrow it from our children - a Native American proverb. Balanced evaluations are necessary. 

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