A new study of best practices in generating and sustaining shareholder value

A new study of best practices in generating and sustaining shareholder value - the Shareowner Alignment Index (SAI) - documents the impact on shareholder value of consistent use of best practices in management, organisation and incentive compensation. Over 60 Global 2000 companies participated in the study, including top firms from the USA, Europe, Asia and Latin America.

Top performers in the study, termed ‘value-aligned’, produced total shareholder returns relative to peer companies of 16% per annum. Overall, the study found that companies which consistently deliver value to shareowners - share the following characteristics.

  • Business decisions are made based on long-range economic value over short-term earnings impact.
  • Board members and top managers have significant equity holdings at risk.
  • Performance measurement focuses on a few straightforward value metrics that include the cost of capital.
  • Incentive plans are uncapped, to instill a culture of ownership by offering an unlimited upside, pegged to sustained value-creation.
  • Projects are ranked and funded strictly according to their economic value.
  • Middle-level managers have high business and financial literacy.
  • Financial information is freely shared throughout the organisation.

    Analysis of the benchmark data uncovered many factors that contribute to the higher valuations accorded to value-aligned companies, within a framework of five major areas: leadership; incentive compensation; culture and organisation; decision-making, and management reporting.

    Richard T Roth, managing director of Hackett Benchmarking & Research, which produced the study in association with Stern Stewart, said the SAI hammers home the fact that poor internal governance erodes the ability to make wise decisions, even among the most dedicated employees and boards.

    A summary of the Shareowner Alignment Index is available at www.saisurvey.com

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