In today’s environment a corporate valuation expert is integral to a corporate board, whether it has external shareholders or not. Quite often boards neglect the need to keep someone with these skills close by whether it is:
– On the board,
– On an advisory board, or
– As a corporate advisor.
I believe that it is a fundamental skill that needs to be kept close to the board’s heart. Here’s why:
Value – pure and simple Corporate Governance is the system by which companies are directed and managed. Good corporate governance structures encourage companies to create value and provide accountability and controls systems commensurate with the risks involved. One of your primary objectives as a profit-seeking organisation will be to maximise shareholders’ wealth. Therefore, one of the fundamental measures of a board’s success will be whether they will have actually created more value for shareholders.
Size doesn’t matter Good governance principles, corporate advisers and fair value accounting have traditionally been the territory of ASX listed or larger companies. However, the fundamental principles behind these topics apply to all companies. It can be expected that shareholders of any sized business will want to create value in that business. If a board doesn’t first take the time to understand what its value is and what the drivers of that value are, it will be only through good fortune that it is increased, rather than diligent planning and execution.
Responsible decision-making
If a board is to execute responsible decision-making, it could be argued that by not first considering the impact of that decision on value, it is not making the decision responsibly. Whether the decision will directly impact the company’s income or expenses, or alter the risk profile of the business, they will all have a potential impact on value.
Brass in pocket
With one eye always on the valuation of the business, it follows that an up-to-date financial model should always exist for the company. Having a focus on the future cash flow of the business and the drivers of those cash flows, the board will be able to assess strategy, focus on key areas of risk and prioritise projects to improve earnings in a more structured way than before.
Friends forever
Good governance and corporate valuation are intimately entwined. Many studies have concluded that good governance can improve the value of a company. This is based on the facts that with better controls, risk mitigation and transparency, valuations are enhanced. A fundamental aspect of the ASX Good Governance principles is to implement systems and structures which will ultimately enhance the value of a company.
Everyone’s doing it…or should be
A Board’s need to consider valuation is becoming more and more common. Whether large listed companies or small owner representative boards, consideration of value should be part of the decision-making. There are obvious occasions such as when considering a potential acquisition or divestment. However, there are a lot more circumstances in which value should be considered.
These include:
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Any new financing arrangements to understand their potential impact on value
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For taxation purposes
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Strategic decisions to ensure focus is given to value creation activities, and
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With an increased emphasis on fair value accounting, valuation is a more essential part of the accounting process.
Therefore, valuation should not be set apart from the day-to-day functions of a Board but rather an integral part of not only good governance, but the day-to-day role of the Board. Whether it’s to help set strategy, review potential outcomes of a proposed decision, or help prioritise the Board’s focus, valuation should be considered essential to the operations of a Board.