Question

What is Value Based Management (VBM)? You might want to address one or more of the following issues: What approach to decision-making would characterize a VBM organization and how does corporate culture play into this? What should the role of the CFO be in an organization that practices VBM fully? Has VBM been an unqualified success for all those who have undertaken the challenge? If not, then to what do you attribute that lack of complete success?

Answer 1

What is Value Based Management (VBM)? You might want to address one or more of the following issues:

Value Based Management (VBM) is a management philosophy that states management should foremost consider the interests of shareholders in its business actions. This framework encompasses the processes for creating, managing, and measuring value.

It is important to note VBM differs from a profit-focused way of managing business. Specifically, VBM means that the decisions that you make today are not simply driven by short-term profit. Instead, we consider the longer-term effects that the decisions will have on organizational sustainability and profitability, reflected in future cash flows.

VBM asks people within a company to think like owners and to make decisions that will ultimately benefit the owners. Managers and executives must constantly look for investment and growth opportunities that will create value—and use the company’s capital in ways that ensure long-term, sustainable success.

The three elements of Value Based Management:

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

Any (large) company operates and is competing in multiple markets:

• The market for its products and services.
• 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).
• The capital markets (competing for investors' favor and money).
• The employees and managers market (competition for company image and ability to attract top talent).

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.

When developing our Value Drivers, we should follow these 3 guiding principles:

1. Value Drivers need to be organized, so that managers can identify which have the greatest impact on value and assign responsibility for them to individuals who can help the organization meet its targets.

1. Value Drivers must be defined at a level of detail consistent with the decision variables that are directly under the control of line management.

1. Generic value drivers (e.g. sales growth, operating margins, and capital turns) might apply to most business units. However, these lack specificity and cannot be used well at the grass roots level.

Management Processes & Systems

Adopting a Value Based Mindset and finding the Value Drivers only gets you halfway there. Managers must also establish processes and systems that bring this mindset to life in the daily activities of the organization.

The 4 essential management processes to consider, in sequence:

1. Strategy Development
   First, our company or business unit develops a strategy to maximize value.

1. Target Setting
   Next, we must translate this strategy into short- and long-term performance targets. These are defined in terms of our key Value Drivers.

1. Action Plans and Budgets
   We then develop action plans and budgets to define the steps that will be taken over the next year to achieve these targets.

1. Performance Management
   Lastly, we need to institute performance measurement and incentive systems in place to monitor performance against targets and to encourage employees to meet their goals.