Rethinking Value-Based Management

Rethinking Value-Based Management

          
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Rethinking Value-Based Management

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    In This Article
    • Delivering superior value creation has become senior management’s most pressing task.
    • However, value-based management’s mixed track record suggests that we should reexamine the lessons of the past decade and craft a more comprehensive and effective approach.
    • The challenge is to rethink how management can better apply the principles and practices of VBM to deliver superior value creation on a sustained basis.
     

    In the early 1990s, the business press, securities analysts, and management consultants widely touted value-based management (VBM) as a new tool to help investors assess companies and help executives evaluate business performance and shareholder value. And conceptually, VBM was a great idea. But after a decade of experience both on Wall Street and inside companies, has VBM realized its promise as either an investing tool or a management tool?

    The answer appears to be mixed. In a recent survey of VBM adopters by professors at INSEAD, respondents’ views ranged from high impact to little or even negative impact of VBM on their companies. The study’s authors concluded that VBM as a discipline added value for those companies that adopted it as a way of life—i.e., a cultural change—and was limited in those that more narrowly deployed it as yet another management tool.

    And recent events raise even broader questions about VBM’s impact. Where was the influence of the VBM discipline on Wall Street during the dot-com boom and bust, or in the corporate suite during the more recent and ongoing controversies over executive pay and accounting improprieties? Did investors, venture capitalists, analysts, consultants, boards, and executives fail to heed the principles, or did the principles of VBM fall short in providing guidance? And, looking forward, does VBM still offer a competitive edge or even a relevant management approach for the next decade?

    VBM’s mixed track record suggests that we should reexamine the lessons of the last decade and craft a more comprehensive and effective approach to deploying VBM. And, in the end, there really is no alternative but to do so. For many reasons, delivering superior value creation has become senior management’s most pressing task. Investors expect it and respond aggressively to its absence. Management and employee security, opportunity, and remuneration are more and more closely tied to stock value performance. Through stock options, its promise has become a key factor in the attraction or retention of both managerial and technical talent. Most major business publications now put a spotlight on annual value creation performance rankings. And—perhaps most importantly—it has become increasingly obvious in many industries that long-term competitive advantage is dependent on access to the capital resources that accompany superior value creation.

    The clear challenge is to rethink how management can better apply the principles and practices of VBM to help deliver superior value creation on a sustained basis. Here, there are a number of new insights and evolving best practice approaches that can elevate and extend both the art and the science of managing value creation. These new approaches better connect VBM with capital markets outcomes and better align organizations to deliver sustained value creation.

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