Value based management

Value based management focuses on the intended beneficiaries of an organization.

Let me remind you of what these terms beneficiary and benefit refer to in relation to corporate objectives.

I have explained elsewhere that the form of a corporate purpose for any organization is set by asking these two simple questions -

  1. Whom does your organization mainly exist to benefit? Is it a company working for shareholders, or a community services non-profit organization working for some other ‘stakeholder’ group?
  2. What is the nature of the benefit are you trying to provide for them?

This gives you the two most vital pieces of a statement of corporate purpose: beneficiaries and benefit. Any organization’s purpose has this form -

< Your organization> exists
to provide <name the benefit> to <name the Intended Beneficiaries>

A purpose has nothing about being ‘excellent’, ‘world class’, ‘leader’ of anything, and so on!

In a business, the purpose for publicly traded companies is to increase the value of the firm for investors.

For non-profit organizations, it will be something different.

You will notice I said improve, not maximize.

Value based management does not mean
maximizing shareholder returns

There are problems with ‘maximizing shareholder value ‘ -

  • How do you verify whether you have ‘maximized shareholder value’? How do you show that they might not have been higher? Do you get the Chief Finance Officer to sign a statutory declaration: ‘I certify this business maximized its profits last year, and not one more dollar could have been pushed out to the shareholders’? No? Then why use a governing objective that you cannot really verify whether or not you have achieved it?
  • How many firms really want to ‘maximize’ their shareholder returns? Will they see a value based management mindset go to any lengths to generate even more shareholders returns, even when they know that these are already as good as the investors could earn elsewhere? Would they really disregard all risks, treat employees inhumanely; behave unlawfully just to extract the last drop of profit?

Value based management focuses on
satisfactory shareholder returns

The purpose of the business is to generate wealth at levels the owners see as ‘satisfactory’, and with a low risk of failure. Value based management works to improve the value drivers throughout the firm, which at a minimum will seek to avoid harm to any stakeholders, and comply with all relevant laws.

It is unhelpful to put shareholder value against corporate social responsibility. Shareholder benefits and behaving well while doing this are two linked responsibilities of top managers.

Advantages of value based management

Among the strengths of managing for value to the Intended Beneficiary are the following -

Decision-making

Management involves streams of decisions. Managers in larger entities make hundreds of decisions every day. These involve complex tradeoffs. For example -

  • Current earnings and long-term payoffs
  • Between maintaining profit margins and maintaining market share.

Managers need clear decision criteria.

It helps to compare the value impact of alternatives and choose the option that creates the most value for shareholders. Other criteria, such as industry leadership, or product excellence, could lead to overinvestment, profitless growth, or value destroying disinvestment.

Feedback

Another virtue of this approach to management is the positive feedback when the firm enhances its ability in value creation. Achieving this usually requires improved information and strategic analysis. In addition, improved organizational design and business processes can produce a stronger capacity for both learning and strategic decision-making.

The advantage emerges in many forms, such as -

  • a common language for strategic planning
  • solid agreement round corporate objectives, strategies, and performance metrics
  • more effective and efficient strategy execution
  • sounder allocation of resources, especially of capital.

This strengthens competitive advantage, which produces better results for the shareholders.

When it is clear what the purpose of the organization is, then mapping the value drivers assists decision making about allocation of resources, as shown in the following diagram.

For more on this subject see this site.

Return from Value Based Management to Corporate Objectives.

Return to Simply Strategic Planning Home Page.


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