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

Forum Forum discussions about Value Based Management. Below you can ask a question about this topic, share your experiences, report a new development, or explain something. Start a new topic about Value Based Management Share your knowledge here (or ask a question)   🔥 NEW Criticism on Value Based Management Some criticize the principles of value-based management, arguing it fails to take into account other constituencies than stakeholders (locals, customers, employees, environment etc). But in order to c... 11   4 comments Total Value Management, The Value Pipe If you want to have new creative ways to startup Value Based Management I have made a new concept called the winning flows. Part of the concept is the value pipe. I have made the value pipe to gi... 10   1 comments Value Based Management (VBM) Focus on Shareholders is Narrow VBM focus on shareholders interest is a narrow concept. To improve value in a lasting way, you also need to consider the employees and the clients in an equitable manner.... 7   4 comments History of Value Based Management (VBM) Value based management arose thanks to the influence of shareholders and financial markets to maximize the market value of the organizations. That's why lots of firms choose this concept and focus on... 6   Value Creation by Social Action The value added to a company based upon a social action is a new road that an organization must put his eyes.... 4   1 comments Values Based Management The above definitions of value based management may lead our managers on the wrong path. It suggests and encourages our managers to have an eye only on value addition in shareholders' net worth. ... 3   13 comments Value Based Management Tools I see (VBM) as tools that drive results, as an approach to business on how a firm should be directed and controlled in order to effectively protect the wealth of the business owners.... 3   Value Based Management is a Continuous Process Value based management ensures continuous scanning of the environment for changes and innovative ways of doing things, both within the firm and outside. It puts CEOs and employees on their toes.<... 1   2 comments

Expert Tips Advanced insights about Value Based Management. Here you will find professional advices by experts. Value Based Management (VBM) Levels Implementing VBM Value Based Management (VBM) can be used (as a basis) for: - Financial Reporting - Investment Analysis - Capital Budg... Stock Buybacks as a Means of Value Extraction Stock Buybacks, Stock Repurchases, Corporate Profitability, Economic Prosperity, Executive Compensation, EPS According to Prof. Lazonick, in the USA the increased corporate profitability over the last couple of years did not lead... Ten Principles for Creating Shareholder Value (Rappaport) Creating Long-term Shareholder Value Alfred Rappaport published his magnificent book "Creating Shareholder Value" in 1986, and should be considered as the go...

Information Sources Various sources of information regarding Value Based Management. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops. The purpose of the corporation: Shareholder-value maximization? Corporate purpose, shareholder value, corporate target, corporate governance Allegedly, there is widespread consensus that firms should maximize shareholder value, and that doing so would be good f... VBM: EVA or CVA? EVA vs. Cash Value Added The Cash Value Added framework discussed in this paper by Fredrik Weissenrieder refers to the concept developed by Erik ... Corporate Valuation for Businesses Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing Presentation that elaborates on corporate valuation, including the following sections: 1. Three types of value: - Book... Value Based Management and the Multidimensionality of Value Corporate Sustainability, Value Added, Value Based Management Achim Seisreiner and Sebastian Traeger argue that a multi-dimensional value framework will help Value Based Management (... A Shareholder Value Review Monitoring Management Performa A Shareholder Value Review (SVR) is proposed by Bartley J. Madden as the best way for boards of directors to explain to ...

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