A strategic approach in managing shareholders' wealth for companies listed on the JSE securities exchange South Africa

Abstract

For a number of years there has been a growing awareness of the importance of shareholder value for financial strategy and management. At the same time, there has been growing concern that the traditional accounting measures of performance have serious inherent limitations that may lead to poor financial decision-making. This study starts off by providing an overview of the main accounting earnings-based measures, as well as the most important criticisms leveled against them. The concepts of Economic Value Added (EVA) and Market Value Added (MVA), which are currently regarded as the most important indicators of shareholder value and financial performance, are examined, along with some research evidence supporting them (and other evidence opposing them). Various aspects of EVA and MVA are discussed, including different ways of calculating them, and their link to other financial concepts such as net present value (NPV) and operating and financial leverage. After a discussion of the main drivers of EVA, namely the Return on Invested Capital (ROIC), the weighted average cost of capital (WACC), the performance spread and the invested capital (IC), the financial strategy matrix is introduced. The financial strategy matrix has been used in this study to evaluate companies in terms of internal value creation (performance spreads) and cash flow management (sales growth compared to the sustainable growth rate). A selection of companies listed on the JSE was ranked according to their relative performance in terms of internal value creation (performance spreads) and the results of some individual companies and sectors were placed on the financial strategy matrix. The statistical tests done on the data have indicated that the sales growth minus the sustainable growth rate does not contribute significantly to shareholder value and an alternative variable was recommended. Further tests have revealed that significant correlation between MVA and EVA could only be found if the median results over a ten-year period were used. The correlation between MVA and the main drivers of EVA was found to be weak on a year-on-year basis. It is hoped that the results and perspectives gained from this study will be helpful to financial managers who aim to optimize their approach to shareholder value management.