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Total Shareholder Return: Planning a Future Perfect

Total shareholder return can not only be a measure of past performance, but it can be harnessed as the prime touchstone for planning future performance.

Fortnightly Magazine - January 2006

basic questions:

  • What is your plan to achieve the company’s targeted TSR? and
  • What progress are you making with respect to that plan?

Each of these questions, of course, leads to a host of subsidiary questions that lie beyond the scope of this article. But notice that even these very general questions are quite different from those questions that commonly frame management performance issues. Questions like, How much are you going to reduce costs next year over this year? What is your projected revenue growth? Are you managing within your capital budget? These latter questions are important, but their relevance and their relative priority need to be framed. We suggest that the framing is best achieved by anchoring all economic performance measures in the specifics of a long-term TSR plan.

TSR should be an important goal and measure of management. Properly employed, it directly links management priorities to the interest of shareholders, and it provides a long-term perspective on the plans, investments, and strategies needed to build enterprise value. Improperly employed, however, it creates expectations for management performance that are inherently unattainable.

In reaction, management reaches for other standards of performance, and a metric of vital import is thereby sidelined in favor of more complicated, sometimes conflicting, potentially sub-optimizing metrics. TSR should play a more prominent role in management choices. Techniques are readily at hand for providing it the central billing it deserves.



1. EVA never has found particular favor among utilities, largely because it is typically treated as an all-or-nothing analytic approach that must be administered comprehensively and pervasively if it is to be used at all. When applied in this way, it can occupy more time in analysis than seems justified by the gain in management insight. But EVA does not need to be applied to the nth detail. It is illuminating at the corporate level in understanding the economic contributions of different elements of the corporate portfolio. It then can be applied in cascading levels of detail to whatever depth management finds useful, and no further. Even at a high level of generality it provides important insight into an enterprise’s sources of value.

2. It’s important not to confuse return on equity or return on assets with return on share price. Whereas return on equity can be higher than the cost of equity capital (thereby creating value) or lower (thereby wasting value), the expected return on share price always will tend to equal the cost of equity capital. If the expected payout in dividends and price appreciation drops, the price will drop; if the expected payout rises, the price will rise. In either event, the percentage return gravitates toward a consistent cost-of-equity capital. The wide swings in share price observable over the past few years may seem to belie this contention, until one reflects that in the wake of Enron, California, etc., investors’ “traditional evaluation” of utility risk became unhinged. That disorientation (combined with substantial re-evaluation of growth expectation for many companies) drove down share price steeply. Once calm returned with the industry’s strategic retrenchment and with