How to Improve Stockholder's Equity

by David Carnes

Large corporations are different from most other forms of businesses because ownership is often separate from management. This can result in shortsighted corporate decision-making that is not in the best interest of its shareholders. Improving the efficiency and profitability of the company, however, eventually results in higher share prices, satisfied shareholders and higher compensation for management. You can maximize shareholder value by streamlining company operations and increasing investment in productive lines of business while phasing out unproductive lines and tying employee compensation to company performance.

Identify your company's core strengths -- what it's best at doing, in other words -- and then outsource as much of the rest of the business to third-party contractors. Outsourcing might increase productivity and profitability, even if the third party contractor charges more than the service was directly costing your company. If the activity is within the third party's core competencies, they will perform it more efficiently than your company.

Sell the assets of underperforming divisions of your company, if you cannot outsource their functions. Invest the revenue generated by the sale into high-performing divisions.

Buy back some of the company's shares, if they are publicly traded and if your company can afford to do so. Reducing the number of shares on the open market will favorably influence their supply/demand dynamics, resulting in an increase in the trading price.

Examine your company's operating dynamics to identify and eliminate bottlenecks, inefficiencies and redundancies. For example, if each department or branch of the company has its own accountants, consider merging them into a single centralized accounting office where employees share work from all departments according to their individual strengths and weaknesses.

Upgrade and rationalize your company's physical plant. A newer, more efficient computer system, for example, will cost money but could easily pay for itself by increasing productivity.

Retain and reinvest company earnings rather than distributing them to shareholders as dividends. This approach will cost shareholders money in the short run, but will increase the value of their shares in the long run by increasing the company's productive resources.

Supplement the compensation of both managers and rank-and-file employees with company shares. Because this aligns interests, this will provide all levels of the company with a financial incentive to do whatever they can to maximize shareholder value.

Tip

  • When seeking to maximize shareholder value, consider the opportunity cost of various options. If engaging in a particular activity will siphon off resources from another, more productive activity, consider abandoning it.

About the Author

David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

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