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Achieving Fair Value

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Achieving Fair Value

How Companies Can Better Manage Their Relationships with Investors

Wiley,

15 min read
10 take-aways
Audio & text

What's inside?

Can your company affect how the market values its stock? Perhaps, if you can find and sway your pivotal investors.

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Editorial Rating

5

Qualities

  • Innovative
  • Overview

Recommendation

Warning: approach this focused book with some caution. Author Mark C. Scott seems knowledgeable about the United Kingdom’s market structures and practices. However, his text has some apparent flubs about U.S. financial theory and practice. For instance, he refers repeatedly to Sarbanes-Oxley legislation as "Oxley-Sarbanes." Is this just faulty proofreading, or a signal of unfamiliarity with the U.S. markets? Idiosyncratically, Scott uses the phrase "perfect markets" when he means "efficient markets," yet even market efficiency advocates acknowledge that markets are not "perfectly" efficient. Because this point is fundamental in financial theory, the distinction is worrisome in terms of assessing the book’s expertise. Scott refers to extensive research, but should have included more of it here. With those caveats, however, getAbstract gives him full credit for outlining an interesting, unconventional thesis about how markets work, how shares are valued and how companies should handle their communication with shareholders. Some of this information may be genuinely helpful to companies in the U.K., though it seems, perhaps, less applicable elsewhere. (For example, some of the shareholder communication practices described - such as making the managers of important funds into "temporary insiders" - should be evaluated in light of the Security and Exchange Commission’s disclosure laws before being considered in the U.S.)

Summary

Managing Markets

CEOs and CFOs spend substantial time attending to the financial markets. Most large corporations have investment relations directors and analysts who interact with institutional fund managers. In the United Kingdom, they also work with a "House Broker," who markets a company’s stock. Companies probably spend on average £2 million per year on this effort, not counting the indirect cost of top executives’ time. Management invests these resources because its fate depends on the stock price. But managers face a dilemma. If they convince the market that their stock deserves a high price, they may struggle to meet unrealistic market expectations, but if the stock price falters or fails, they may struggle to find new jobs.

The "Fair Value" approach aims to relieve management of attempting to meet or explain away unrealistically optimistic or pessimistic expectations. Fair value depends on the company’s fundamental performance. This is not the same as maximizing total shareholder returns, since share prices are a poor guide to the success or failure of fundamental performance.

The Risks of Share Prices that Are Too High or Too Low

Many managers...

About the Author

Mark C. Scott is the director of a strategic management center and the author of four books including The Professional Service Firm and Value Drivers.

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