Question

How do companies quantify their value? Is there a difference between shareholder and company value? Why?

Answer 1

1. How do companies quantify their value?

According to CIOs, there are several different metrics that can be used to measure value, key ones are :

- Financial metrics such as Revenue, profit, share price - the most common metric used by firms is the growth in revenue/profit measured quarter on quarter / year on year. Earnings for specific periods are forecasted by firms as goals that they need to achieve. The final numbers are calculated and reported via financial statements at the end of quarters/years and these are used as an indication of whether the firm is successful or not. Share prices are another such indicator that provides a quantifiable view of value.

- Market growth - For firms that are have stabilised their financial metrics, market growth can reflect success of their products e.g. growth into another continent, third world regions etc. Increase in the customer base can directly imply value.

- Project/product success rate or quality (on time/budget, meeting objectives, exceptional quality) - Some firms can count value in their quality of work (as opposed to quantity). There are product firms that make limited products a year only and quantify their value in the quality of their work e.g. 100% error free watches, exquisitely aged alcohol/liquors, unmatchable cigars.

- Degree of innovation - Firms can quantify value by always bringing in cutting-edge content to the world. Innovations are highly profitable these days and being a firm that focuses on creativity and bringing new and unusual products to market is a value that a lot of firms aspire to. e.g. Google brings out new and innovative designs and products, usually being the first one to do so , such as google glasses. The iPad was a brand new innovation that was unmatched for a long time and has cemented Apple as a top brand because of their quick-to-market innovative products.

(Suer, 2018)

- Brand value - The image of a company is taking on more and more importance in this widely networked world. Mistakes are not forgiven or forgotten easily and so it is even more imperative that they are avoided and that care is taken to ensure and retain a sound, honest, responsible and integrity-focused brand image. Firms measure their brand value regularly to ensure they capture the reflected value of their workings.

- Impact of products/services - Non-profit firms do not usually use the above metrics to measure value. Value for them is the value the products and services bring to their customers. e.g. school books that allow young people to study, an apple tree that can provide a source of food for a family. Value in this case is the impact, environmental or social, that though not quantifiable in the usual ways is still an aspect that should be measured as an indicator of success.

2. Is there a difference between shareholder and company value? Why?

Shareholders are owners who have an investment in the company, most likely monetary. Shareholder value is what they are getting for their investment - usually this means profit, but can also mean good prospects and longevity of the firm, and a good brand value. The value to the shareholders can be payouts such as dividends or an increase of their investment/wealth by making the company more profitable, or a better image that can translate to value elsewhere.

Company value can be monetary (assuming it is not a non-profit) and short-term as they seek to increase the share price, grow revenues, and boost profits quarter on quarter. It can also include considerations that extend beyond shareholders, such as employees, vendors, supply chain partners, and the community/industry in which they operate. To ensure a long-term sustainability, companies need to ensure that all stakeholders in the firm are part of the value and growth that is measured. Making money while destroying the environment might benefit the shareholders in the short run, however it will likely damage the reputation of the firm irrevocably and lead to its decline in the long run.

(Randel, 2019)

Company value therefore must necessarily be defined differently than Shareholder value (though aligned with it), if the company plans to run a long, successful, sustainable and responsible business. Taking good care of its employees/vendors/partners will ensure lower attrition and build loyalty that can add tremendous value to a company even if it cannot be measured in shareholder value terms.

References :

Randel, Jane. (2019) Shareholder Value vs. Corporate Purpose: Why Choose?. Linkedin.

Suer, Myles. F. (2018) How CIOs prove business value. CIO.