The guiding principle of business value creation: a return on capital that exceeds cost of capital in the long run

The real business of business

Shareholder-oriented capitalism is still the best path to broad economic prosperity, as long as companies focus on the long term.

The guiding principle of business value creation is a refreshingly simple construct: companies that grow and earn a return on capital that exceeds their cost of capital create value

If investors knew as much about a company as its managers, maximizing its current share price might be equivalent to maximizing value over time. In the real world, investors have only a company’s published financial results and their own assessment of the quality and integrity of its management team. For large companies, it’s difficult even for insiders to know how the financial results are generated. Investors in most companies don’t know what’s really going on inside a company or what decisions managers are making. They can’t know, for example, whether the company is improving its margins by finding more efficient ways to work or by simply skimping on product development, maintenance, or marketing.

Since investors don’t have complete information, it’s not difficult for companies to pump up their share price in the short term.

Sshareholder model, thoughtfully embraced as a collective approach to present and future value creation, is the best at bridging the broad and varied interests of shareholders and stakeholders alike.

http://www.mckinsey.com/insights/corporate_finance/the_real_business_of_business?cid=other-eml-alt-mip-mck-oth-1503

 

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