For Better Corporate Governance, The Shareholder Value Review

This article proposes a three-part Shareholder Value Review (SVR), possibly mandated by the SEC, as a means for corporate boards to communicate to shareholders how the board monitors management's performance in increasing shareholder value. The first part of the SVR would provide a description of the valuation model chosen by management and the board to guide corporate actions and evaluate periodic performance. (The author recommends a life-cycle valuation model rooted in both discounted cash flow principles and the economic concept of competitive corporate life-cycles.) The second part of the SVR would present historical time series of the key drivers of that valuation model for each of the firm's major business units. The third and final part would contain the board's account of how value has been created or reduced by each unit, along with a statement of management's rationale for each unit's strategy and planned future investments. The author argues that SVRs would motivate management and boards to reduce their emphasis on meeting Wall Street's quarterly earnings targets and focus instead on managing the firm's assets to create wealth over the long term. And especially if required by the SEC, SVRs would force earlier recognition of problems in mismanaged companies and quicker responses by their boards in demanding needed change.