{"id":7356,"date":"2020-09-14T07:23:34","date_gmt":"2020-09-14T12:23:34","guid":{"rendered":"https:\/\/flevy.com\/blog\/?p=7356"},"modified":"2020-12-18T21:00:08","modified_gmt":"2020-12-19T02:00:08","slug":"shareholder-value-traps-how-to-avoid-them-and-create-value-for-your-organization","status":"publish","type":"post","link":"https:\/\/flevy.com\/blog\/shareholder-value-traps-how-to-avoid-them-and-create-value-for-your-organization\/","title":{"rendered":"Shareholder Value Traps: How to Avoid Them and Create Value for Your Organization"},"content":{"rendered":"<p><img decoding=\"async\" class=\"alignright size-medium wp-image-7358\" src=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Value-Trap2-300x200.jpg\" alt=\"\" width=\"300\" height=\"200\" srcset=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Value-Trap2-300x200.jpg 300w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Value-Trap2-768x512.jpg 768w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Value-Trap2-1024x683.jpg 1024w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Value-Trap2.jpg 1920w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/>Changing industry ecosystems and competition today demand from the organizations to undergo strategic shifts.\u00a0 The purpose of a company is undergoing <a href=\"https:\/\/flevy.com\/browse\/stream\/transformation\">Business Transformation<\/a> from serving the interest of shareholders to serving all stakeholders that influence the organization.<\/p>\n<p>Shareholders are often considered the only stakeholders that invest in a business.\u00a0 Senior management needs to be cognizant of the importance of shareholders as well other stakeholders who create value for the organization.\u00a0 They should work on building a collaborative <a href=\"https:\/\/flevy.com\/browse\/stream\/culture\">Organizational Culture<\/a> and paying heed to the welfare of all those groups that play a role in organizational growth.<\/p>\n<p>This warrants a thorough evaluation of all stakeholders, their long-term interests, and <a href=\"https:\/\/flevy.com\/browse\/stream\/value-creation\">Value Creation<\/a>\u2014or Value Destruction\u2014potential for the organization.\u00a0 But first, this calls for finding answers to the following key questions:<\/p>\n<ul>\n<li>Who creates the most value for the organization?<\/li>\n<li>Who among the stakeholders typically secure the best deals from the organization?<\/li>\n<li>Who is the victim of having the worst deals from the organization?<\/li>\n<li>Who among the stakeholders is potentially untrustworthy?<\/li>\n<li>Are there any intermediaries or stakeholders fulfilling their personal agendas?<\/li>\n<\/ul>\n<p>Answering these questions is critical for the executives, otherwise they may risk falling into <a href=\"https:\/\/flevy.com\/browse\/flevypro\/shareholder-value-traps-5239\">Shareholder Value Traps<\/a>.\u00a0 Recognizing and understanding stakeholder value traps while the <a href=\"https:\/\/flevy.com\/business-toolkit\/stakeholder-management\">managing stakeholders<\/a>&#8216; various interests helps executives achieve shared and individual long-term goals. \u00a0These 5 common traps prevent stakeholders\u2019 interests to get integrated with the interests of the organization and destroy the value of a company if overlooked:<\/p>\n<ol>\n<li><strong>Ignoring cash-flow driving stakeholders while distributing cash<\/strong><\/li>\n<li><strong>Miscalculating reaction from stakeholders<\/strong><\/li>\n<li><strong>Supporting under-performing units <\/strong><\/li>\n<li><strong>Conceding to willful vulture capitalists <\/strong><\/li>\n<li><strong>Misjudging intermediaries role in transactions <\/strong><\/li>\n<\/ol>\n<p><a href=\"https:\/\/flevy.com\/browse\/flevypro\/shareholder-value-traps-5239\"><img decoding=\"async\" class=\"aligncenter size-full wp-image-7377\" src=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Shareholder-Value-Traps.png\" alt=\"\" width=\"1002\" height=\"752\" srcset=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Shareholder-Value-Traps.png 1002w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Shareholder-Value-Traps-300x225.png 300w, https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/09\/Shareholder-Value-Traps-768x576.png 768w\" sizes=\"(max-width: 1002px) 100vw, 1002px\" \/><\/a><\/p>\n<p>Let\u2019s discuss 3 of these stakeholder traps individually.<\/p>\n<p><strong>TRAP 1 \u2013 Ignoring cash-flow driving stakeholders while distributing cash <\/strong><\/p>\n<p>Shareholders are often treated as the critical drivers of long-term cash flows.\u00a0 However, they are often short-term cash flow generators, whereas other stakeholders who provide their input for the organization in the form of their competencies and experience deliver long-term value.\u00a0 These real contributors should be given top priority when distributing cash on earnings.\u00a0 Underestimating or failure to identify the real long-term cash-flow generators can be a fatal value trap for an organization.<\/p>\n<p><strong>TRAP 2 \u2013 Miscalculating reaction from stakeholders<\/strong><\/p>\n<p>Another trap that most executives fall victim to is discounting potential backlash from weak stakeholders upon unfair distribution of cash \/ incentives. \u00a0Mining value from these victims to support shareholder disbursements can be equally detrimental, as annoyed stakeholders\u2014with the help of social media and NGOs\u2014, legal battles, and financial penalties can devastate a firm\u2019s reputation and financial health.<\/p>\n<p><strong>TRAP 3 \u2013 Supporting under-performing units<\/strong><\/p>\n<p>Senior executives and boards at some organizations foster free riders\u2014stakeholders that sap more benefits from the enterprise than the business they generate\u2014at the expense of long-term value shareholders. \u00a0Free riders include an under-performing department close to the board, or a dwindling business unit that is part of a profitable section and whose financials are not categorized separately.<\/p>\n<p>Continued support to these free riders is often at the cost of allocating resources to other potentially more profitable ventures, and this practice has led many companies to losses and even bankruptcies.<\/p>\n<p>Interested in learning more about the <a href=\"https:\/\/flevy.com\/browse\/flevypro\/shareholder-value-traps-5239\">Stakeholder Value Traps<\/a>, types of organizational stakeholders, and strategies to stay clear of the Stakeholder Value Traps?\u00a0 You can download <a href=\"https:\/\/flevy.com\/browse\/flevypro\/shareholder-value-traps-5239\"><u>an editable PowerPoint on <strong>Shareholder Value Traps<\/strong> here <\/u><\/a>on the <a href=\"https:\/\/flevy.com\/browse\">Flevy documents marketplace<\/a>.<\/p>\n<h2>Do You Find Value in This Framework?<\/h2>\n<p>You can download in-depth presentations on this and hundreds of similar business frameworks from the <a href=\"https:\/\/flevy.com\/pro\/library\">FlevyPro Library<\/a>. <a href=\"https:\/\/flevy.com\/pro\">FlevyPro<\/a> is trusted and utilized by 1000s of management consultants and corporate executives. Here&#8217;s what some have to say:<\/p>\n<blockquote><p>&#8220;My FlevyPro subscription provides me with the most popular frameworks and decks in demand in today\u2019s market. They not only augment my existing consulting and coaching offerings and delivery, but also keep me abreast of the latest trends, inspire new products and service offerings for my practice, and educate me in a fraction of the time and money of other solutions. I strongly recommend FlevyPro to any consultant serious about success.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 Bill Branson, Founder at Strategic Business Architects<\/p>\n<\/blockquote>\n<blockquote><p>&#8220;As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 David Coloma, Consulting Area Manager at Cynertia Consulting<\/p>\n<\/blockquote>\n<blockquote><p>&#8220;As a small business owner, the resource material available from FlevyPro has proven to be invaluable. The ability to search for material on demand based our project events and client requirements was great for me and proved very beneficial to my clients. Importantly, being able to easily edit and tailor the material for specific purposes helped us to make presentations, knowledge sharing, and toolkit development, which formed part of the overall program collateral. While FlevyPro contains resource material that any consultancy, project or delivery firm must have, it is an essential part of a small firm or independent consultant&#8217;s toolbox.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 Michael Duff, Managing Director at Change Strategy (UK)<\/p>\n<\/blockquote>\n<blockquote><p>&#8220;FlevyPro has been a brilliant resource for me, as an independent growth consultant, to access a vast knowledge bank of presentations to support my work with clients. In terms of RoI, the value I received from the very first presentation I downloaded paid for my subscription many times over! The quality of the decks available allows me to punch way above my weight \u2013 it&#8217;s like having the resources of a Big 4 consultancy at your fingertips at a microscopic fraction of the overhead.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 Roderick Cameron, Founding Partner at SGFE Ltd<\/p>\n<\/blockquote>\n<blockquote><p>&#8220;Several times a month, I browse FlevyPro for presentations relevant to the job challenge I have (I am a consultant). When the subject requires it, I explore further and buy from the Flevy Marketplace. On all occasions, I read them, analyze them. I take the most relevant and applicable ideas for my work; and, of course, all this translates to my and my clients&#8217; benefits.&#8221;<\/p>\n<p style=\"text-align: right;\">\u2013 Omar Hern\u00e1n Montes Parra, CEO at Quantum SFE<\/p>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>Changing industry ecosystems and competition today demand from the organizations to undergo strategic shifts.\u00a0 The purpose of a company is undergoing Business Transformation from serving the interest of shareholders to serving all stakeholders that influence the organization. Shareholders are often considered the only stakeholders that invest in a business.\u00a0 Senior management needs to be cognizant&hellip;&nbsp;<a href=\"https:\/\/flevy.com\/blog\/shareholder-value-traps-how-to-avoid-them-and-create-value-for-your-organization\/\" rel=\"bookmark\"><span class=\"screen-reader-text\">Shareholder Value Traps: How to Avoid Them and Create Value for Your Organization<\/span><\/a><\/p>\n","protected":false},"author":110,"featured_media":7358,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"neve_meta_sidebar":"","neve_meta_container":"","neve_meta_enable_content_width":"","neve_meta_content_width":0,"neve_meta_title_alignment":"","neve_meta_author_avatar":"","neve_post_elements_order":"","neve_meta_disable_header":"","neve_meta_disable_footer":"","neve_meta_disable_title":"","footnotes":""},"categories":[408],"tags":[2145,1852,1759,678,2146,2144,1199],"class_list":["post-7356","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-management-leadership","tag-collaborative-culture","tag-potential-for-value-creation","tag-shareholder-value","tag-stakeholder-analysis","tag-stakeholder-classification","tag-stakeholder-traps","tag-value-creation"],"_links":{"self":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/7356","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/users\/110"}],"replies":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/comments?post=7356"}],"version-history":[{"count":7,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/7356\/revisions"}],"predecessor-version":[{"id":7799,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/posts\/7356\/revisions\/7799"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media\/7358"}],"wp:attachment":[{"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/media?parent=7356"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/categories?post=7356"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/flevy.com\/blog\/wp-json\/wp\/v2\/tags?post=7356"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}