# Maximizing Shareholder Value: Definition, Calculation, and Strategie

![Closeup of a shareholder marking a proxy ballot for the annual shareholder's meeting.](https://www.investopedia.com/thmb/blyFXJzTaUvK1Vj1bISxCLcTY9g=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/ShareholderValueDefinitionCalculationandHowtoMaximizeItGettyImages-470995471-c807afb7cb4c4ee09cb00ff6f3be8216.jpg)

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## What Is Shareholder Value?

Shareholder value reflects a company's success in delivering financial gains to its equity owners, driven by strategic management decisions that optimize earnings, free cash flow, dividends, and share prices. Understanding and maximizing shareholder value is crucial for long-term business sustainability.  

### Key Takeaways

*   Shareholder value is determined by the company's ability to increase sales, earnings, and capital returns, leading to higher dividends and capital gains for shareholders.  
    
*   Strategic decisions by a company's board and management, such as wise investments and generating high returns on capital, play a crucial role in increasing shareholder value.  
    
*   The concept that corporate directors have a legally mandated duty to maximize shareholder value is deemed a myth according to legal precedents and scholarly interpretations.  
    
*   A firm's effective asset utilization and ability to maintain a healthy cash flow without relying on additional debt or equity are vital for enhancing shareholder value.  
    
*   Shareholder value might not always align with the interests of employees or customers, leading to potential conflicts within corporate environments.

## Exploring the Elements of Shareholder Value

Increasing shareholder value also increases the total amount in the stockholders’ equity section of the [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp). The balance sheet formula is:

*   Assets, minus liabilities, equal stockholders’ equity.
*   Stockholders’ equity includes retained earnings, or the sum of a company’s net income, minus cash dividends since inception.

## Maximizing Asset Efficiency for Shareholder Value

Companies raise capital to buy assets, which they use to generate sales or invest in projects expecting positive returns. A well-managed company maximizes the use of its assets so that the firm can operate with a smaller investment in assets.

Assume, for example, that a plumbing company uses a truck and equipment to complete residential work, and the total cost of these assets is $50,000. The more sales the plumbing firm can generate using the truck and the equipment, the more shareholder value the business creates. Valuable companies are those that can increase [earnings](https://www.investopedia.com/terms/e/earnings.asp) with the same dollar amount of assets.

## Boosting Shareholder Value Through Cash Flow Management

Sufficient cash inflows show strong shareholder value, allowing the company to operate and boost sales without borrowing or issuing more stock. Firms can increase [cash flow](https://www.investopedia.com/terms/o/operatingcashflow.asp) by quickly converting [inventory](https://www.investopedia.com/terms/i/inventory.asp) and [accounts receivable](https://www.investopedia.com/terms/a/accountsreceivable.asp) into cash collections.

The rate of cash collection is measured by [turnover ratios](https://www.investopedia.com/terms/t/turnoverratio.asp); companies attempt to increase sales without the need to carry more inventory or increase the average dollar amount of receivables. High inventory and accounts receivable turnover rates boost shareholder value.

## The Impact of Earnings Per Share on Investment Value

If management makes decisions that increase [net income](https://www.investopedia.com/ask/answers/101314/what-are-differences-between-gross-profit-and-net-income.asp) each year, the company can either pay a larger [cash dividend](https://www.investopedia.com/terms/c/cashdividend.asp) or retain earnings for use in the business. A company’s [earnings per share (EPS)](https://www.investopedia.com/terms/e/eps.asp) is defined as earnings available to common shareholders, divided by common stock shares outstanding; the ratio is a key indicator of a firm’s shareholder value. When a company can increase earnings, the ratio increases and investors view the company as more valuable.

## Debunking the Myth of Shareholder Value Maximization

It is commonly understood that corporate directors and management have a duty to maximize shareholder value, especially for publicly traded companies. However, legal rulings suggest that this commonly held belief is, in fact, a myth: There is actually no legal duty to maximize [profits](https://www.investopedia.com/terms/p/profit.asp) while managing a corporation.

The idea can be traced in large part to the oversized effects of a single outdated and widely misunderstood ruling by the Michigan Supreme Court in its 1919 decision in _Dodge v. Ford Motor Co._, which was about the legal duty of a controlling majority shareholder with respect to a minority shareholder and not about maximizing shareholder value. Legal and organizational scholars, such as Cornell University law professor Lynn A. Stout and Paris’ Sciences Po Law School professor Jean-Philippe Robé, who is a member of the bar in Paris and New York, have elaborated on this misconception.

## What Is a Balance Sheet?

The term “balance sheet” refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s [capital structure](https://www.investopedia.com/terms/c/capitalstructure.asp).

In short, the balance sheet is a [financial statement](https://www.investopedia.com/terms/f/financial-statements.asp) that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. Balance sheets can be used with other important financial statements to conduct fundamental analyses or calculate financial ratios.

## What Is a Capital Gain?

Capital gain refers to the increase in the value of a [capital asset](https://www.investopedia.com/terms/c/capitalasset.asp) when it is sold. Put simply, a capital gain occurs when you sell an asset for more than what you originally paid for it.

Almost any type of asset you own is a capital asset. This can include a type of investment (like a stock, bond, or real estate) or something purchased for personal use (like furniture or a boat). Capital gains are [realized](https://www.investopedia.com/terms/r/realizedprofit.asp) when you sell an asset by subtracting the original purchase price from the sale price. In certain circumstances, the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp) taxes individuals on capital gains.

## What’s the Difference Between Tangible and Intangible Assets?

There are two types of asset categories: tangible and intangible.

[Tangible assets](https://www.investopedia.com/terms/t/tangibleasset.asp) are typically physical assets or property owned by a company, such as computer equipment. Tangible assets are the main type of assets that companies use to produce their product and service.

[Intangible assets](https://www.investopedia.com/terms/i/intangibleasset.asp) don’t physically exist, yet they have a monetary value since they represent potential [revenue](https://www.investopedia.com/terms/r/revenue.asp). A type of intangible asset could be a copyright to a song. The record company that owns the copyright would get paid a royalty each time the song is played.

There are various types of assets that could be considered tangible or intangible, some of which are short-term or long-term assets.

## The Bottom Line

Maximizing shareholder value hinges on strategic decisions by a company's board and management, focusing on sound investments and robust returns on capital. Successful strategies can lead to increased share prices and higher dividends. Notably, mergers can significantly boost shareholder value. However, this focus can spark debate, as benefits to shareholders may not equitably extend to employees or customers.

> **Article Sources**
>
> 1.  Harvard Law School Forum on Corporate Governance. “[_Dodge v. Ford_: What Happened and Why?](https://corpgov.law.harvard.edu/2021/12/01/dodge-v-ford-what-happened-and-why/)”
>     
> 2.  Scholarship@Cornell Law: A Digital Repository, Cornell Law School. “[New Thinking on ‘Shareholder Primacy’](https://scholarship.law.cornell.edu/facpub/1554/).”