Value Based Management

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Ensuring that corporations are managed consistently on (maximizing) shareholder value. Explanation of Value Based Management.


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What is Value Based Management? Definition

Definition 1: Value Based Management (VBM) is the management approach that ensures corporations are managed consistently on value (normally: maximizing shareholder value).

Definition 2: Value Based Management aims to provide consistency of:

  • the corporate mission (business philosophy),
  • the corporate strategy to achieve the corporate mission and purpose,
  • corporate governance (who determines the corporate mission and regulates the corporation),
  • the corporate culture,
  • corporate communication,
  • organization of the corporation,
  • decision processes and systems,
  • performance management processes and systems, and
  • reward processes and systems,

with the corporate purpose and values a corporation wants to achieve (normally: maximizing shareholder value).

The three elements of Value Based Management

  1. Creating Value. How the company can increase or generate maximum future value. More or less equal to strategy.
  2. Managing for Value. Governance, change management, organizational culture, communication, leadership.
  3. Measuring Value. Valuation.

Value Based Management is dependent on the corporate purpose and the corporate values. The corporate purpose can either be economic (Shareholder Value) or can also aim at other constituents directly (Stakeholder Value).

Why is Value Based Management important?

Note that any (large) company operates and is competing in multiple markets:

  1. The market for its products and services.
  2. The market for corporate management and control (competition on determining who is in charge of an organization, threat of takeover, restructuring and/or a  Leveraged Buy-out.
  3. The capital markets (competing for investors' favor and money).
  4. The employees and managers market (competition for company image and ability to attract top talent).

Any failure to be competitive in one or more of these markets, may seriously jeopardize the survival chances of a corporation. Value Based Management can help organizations to win in each of these 4 markets.

In recent years, traditional accounting methods and metrics have turned out to be very unreliable. This has also supported the emergence of new value-based oriented metrics such as Economic Value Added, CFROI, Market Value Added and other Value Based Management mechanisms.

What are the benefits of Value Based Management?

  • Can maximize value creation consistently.
  • It increases corporate transparency.
  • It helps organizations to deal with globalized and deregulated capital markets.
  • Aligns the interests of (top) managers with the interests of shareholders and stakeholders.
  • Facilitates communication with investors, analysts and communication with stakeholders.
  • Improves internal communication about the strategy.
  • Prevents undervaluation of the stock.
  • It sets clear management priorities.
  • Facilitates to improve decision making.
  • It helps to balance short-term, middle-term and long-term trade-offs.
  • Encourages value-creating investments.
  • Improves the allocation of resources.
  • Streamlines planning and budgeting.
  • It sets effective targets for compensation.
  • Facilitates the use of stocks for mergers or acquisitions.
  • Prevents takeovers.
  • It helps to better manage increased complexity and greater uncertainty and risk.

Limitations of Value Based Management

The drawbacks of Value Based Management are the opposite of its benefits.

  • VBM is an all-embracing, holistic management philosophy, often requiring culture change. Because of this, VBM programs are typically large scale initiatives. To be successful they take considerable time, resources and patience.
  • Value creation may sound more simple than corporate strategy, but it isn't. It is actually more or less the same.
  • Economic Value Added, Performance Management and Balanced Scorecard are very powerful management support tools and processes. However they have their own costs. Therefore it is generally not advisable to go too deep in detail and use measuring methods that are over-complex.
  • Extreme caution should be taken not to measure the wrong things as this will almost certainly lead to value destruction.
  • VBM requires strong and explicit CEO and Executive Board support.
  • Comprehensive training and management consultancy are advisable or even necessary, but can be quite costly.
  • The perfect VBM or valuation model has not been invented yet. Any method you choose, will always have drawbacks which you should consider.

Book: Andrew Black - Questions of Value -

Book: S. David Young and Stephen F. O'Byrne - EVA and Value Based Management -

Value Based Management Forum
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Value Based Management (VBM) LevelsSign up

Value Based Management (VBM) can be used (as a bas...
Usage (application): Implementing VBM

Stock Buybacks as a Means of Value ExtractionSign up

According to Prof. Lazonick, in the USA the increa...
Usage (application): Stock Buybacks, Stock Repurchases, Corporate Profitability, Economic Prosperity, Executive Compensation, EPS

Ten Principles for Creating Shareholder Value (Rappaport)Sign up

Alfred Rappaport published his magnificent book "C...
Usage (application): Creating Long-term Shareholder Value

Resources - Value Based Management Premium

The purpose of the corporation: Shareholder-value maximization?Sign up

Allegedly, there is widespread consensus that firm...
Usage (application): Corporate purpose, shareholder value, corporate target, corporate governance

VBM: EVA or CVA?Sign up

The Cash Value Added framework discussed in this p...
Usage (application): EVA vs. Cash Value Added

Corporate Valuation for BusinessesSign up

Presentation that elaborates on corporate valuatio...
Usage (application): Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing

Value Based Management and the Multidimensionality of ValueSign up

Achim Seisreiner and Sebastian Traeger argue that ...
Usage (application): Corporate Sustainability, Value Added, Value Based Management

A Shareholder Value ReviewSign up

A Shareholder Value Review (SVR) is proposed by Ba...
Usage (application): Monitoring Management Performa

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Compare with Value Based Management: Clarkson Principles  |  Intrinsic Stakeholder Commitment  |  Strategic Stakeholder Management  |  Seven Surprises  |  Strategic Intent  |  Performance Management  |  Strategy Dynamics  |  Shareholder Value Perspective  |  Stakeholder Value Perspective  |  Value Profit Chain

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