Creating Shareholder Value
In today’s fast-paced and rapidly evolving landscape, leaders must be prepared to encounter unpredictable market forces. Over time, these tsunamis of change such as disruptive technologies, artificial intelligence and geopolitical shifts build in momentum until they crash on the shores of unprepared firms, causing enormous damage to all stakeholders, and specifically to shareholders!
However, what differentiates firms that embrace change and are prepared to disrupt others, from those that are merely swayed by the tides? Given a binary choice, which type of firms do capital markets value most? The risk takers that pursue exponential growth, or those who prefer the safe harbour of predictable cashflows and sticking to core business?
The Expectation Premium
Futureworld, using data provided by Applied Finance, is able to quantify how capital markets value innovators. If a firm’s market capitalization is higher than its intrinsic value, shareholders are paying a premium to be invested in the firm. This is simply described as an expectation premium (an expectation that a firm’s intrinsic value will adjust upwards over time as a result of compounding future growth prospects), or an expectation discount (where market capitalisation is lower than intrinsic value, interpreted as an expectation that a firm’s intrinsic value will diminish over time).
Interesting conclusions can be made from the analysis as it pertains to which sectors capital markets are paying a premium to be invested in. The universal truth is that capital markets have always paid a premium to be invested in certain sectors, and discounted others. In the 1900’s, premiums were paid for oil, textiles, railroads and steel companies. The reality that firms are faced with today, is that premiums are often paid at the intersect of various sectors – those who are not defined by an industry or sector and are creating entirely new ones.
Which type of firm do you lead? One that defines its own playing fields, or one that is defined by past legacy?
The New Rules of Capital Markets
Capital markets are experiencing a notable shift from tangible to intangible assets across increasingly blurred industry borders. These new rules of capital markets are driven by several factors, which Futureworld International Co-Founder, Louis Geeringh, explores below.
Leaders who fail to recognise these shifts risk eroding shareholder value. On the other hand, those who embrace the changing landscape have the opportunity to create lasting value and unlock exponential growth.
These are the leaders who don’t wait for the future, they create it.
