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1/2/2021 Shareholder Value Traps: How to Evade Them and Focus on Value Creation for Your Organization | by Mark Bridges | Medium
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Mark Bridges
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Shareholder Value Traps: How to Evade Them
and Focus on Value Creation for Your
Organization
Mark Bridges Sep 14, 2020 · 5 min read
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1/2/2021 Shareholder Value Traps: How to Evade Them and Focus on Value Creation for Your Organization | by Mark Bridges | Medium
https://mark-bridges.medium.com/shareholder-value-traps-how-to-evade-them-and-focus-on-value-creation-for-your-organization-de22e2c2901c 2/6
Changing industry ecosystems and competition today demand from the organizations to
undergo strategic shifts. 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. Senior
management needs to be cognizant of the importance of shareholders as well other
stakeholders who create value for the organization. They should work on building a
collaborative Organizational Culture and paying heed to the welfare of all those groups
that play a role in organizational growth.
This warrants a thorough evaluation of all stakeholders, their long-term interests, and
Value Creation — or Value Destruction — potential for the organization. But first, this
calls for finding answers to the following key questions:
Who creates the most value for the organization?
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1/2/2021 Shareholder Value Traps: How to Evade Them and Focus on Value Creation for Your Organization | by Mark Bridges | Medium
https://mark-bridges.medium.com/shareholder-value-traps-how-to-evade-them-and-focus-on-value-creation-for-your-organization-de22e2c2901c 3/6
Who among the stakeholders typically secure the best deals from the organization?
Who is the victim of having the worst deals from the organization?
Who among the stakeholders is potentially untrustworthy?
Are there any intermediaries or stakeholders fulfilling their personal agendas?
Answering these questions is critical for the executives, otherwise they may risk falling
into Shareholder Value Traps. Recognizing and understanding stakeholder value traps
while the managing stakeholders’ various interests helps executives achieve shared and
individual long-term goals. These 5 common traps prevent stakeholders’ interests to get
integrated with the interests of the organization and destroy the value of a company if
overlooked:
1. Ignoring cash-flow driving stakeholders while distributing cash
2. Miscalculating reaction from stakeholders
3. Supporting under-performing units
4. Conceding to willful vulture capitalists
5. Misjudging intermediaries role in transactions
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1/2/2021 Shareholder Value Traps: How to Evade Them and Focus on Value Creation for Your Organization | by Mark Bridges | Medium
https://mark-bridges.medium.com/shareholder-value-traps-how-to-evade-them-and-focus-on-value-creation-for-your-organization-de22e2c2901c 4/6
Let’s discuss 3 of these stakeholder traps individually.
TRAP 1 — Ignoring cash-flow driving stakeholders while distributing cash
Shareholders are often treated as the critical drivers of long-term cash flows. 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. These real contributors should be given top priority when distributing
cash on earnings. Underestimating or failure to identify the real long-term cash-flow
generators can be a fatal value trap for an organization.
TRAP 2 — Miscalculating reaction from stakeholders
Another trap that most executives fall victim to is discounting potential backlash from
weak stakeholders upon unfair distribution of cash / incentives. Mining value from these
victims to support shareholder disbursements can be equally detrimental, as annoyed
stakeholders — with the help of social media and NGOs — , legal battles, and financial
penalties can devastate a firm’s reputation and financial health.
TRAP 3 — Supporting under-performing units
Senior executives and boards at some organizations foster free riders — stakeholders
that sap more benefits from the enterprise than the business they generate — at the
expense of long-term value shareholders. Free 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.
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.
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5.
1/2/2021 Shareholder Value Traps: How to Evade Them and Focus on Value Creation for Your Organization | by Mark Bridges | Medium
https://mark-bridges.medium.com/shareholder-value-traps-how-to-evade-them-and-focus-on-value-creation-for-your-organization-de22e2c2901c 5/6
Interested in learning more about the Stakeholder Value Traps, types of organizational
stakeholders, and strategies to stay clear of the Stakeholder Value Traps? You can
download an editable PowerPoint on Shareholder Value Traps here on the Flevy
documents marketplace.
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