Beyond the Value Gap

Mark Scott explains how matching share price to the real worth of your firm is an art. If you ask any owner manager of a private company what is their ultimate mission, the answer will be simple: to maximise the wealth created for them by the business. But what they usually mean is: managing the business in a way that maximises profitability and cashflow and therefore return on the equity they have invested in it. In other words, their root concern will be fundamental performance. If you ask the same question of managers of listed businesses you may get a subtly different answer. They talk of maximising shareholder value: another term for shareholder wealth. But what they mean is maximising share price, not necessarily fundamental performance. There is an important distinction between the two: one relates to how the markets perceive future performance potential, and hence stimulate demand for the shares, and the other relates to actual performance.

Scott, M.C. (2004) Beyond the Value Gap, The Times, 2 March.

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