Increasing Firm’s Value Through

Value-Based Management

By: Mohamed Azmi Taufik

o A business company main objective is to maximise shareholder wealth (value).

o Value is created only when the rate of return is higher than the cost of capital.

Introduction

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Objectiveso Understand the meaning of VBM

o VBM metric, measures & value creation

o Challenges in implementing VBM

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o Definitiono Frameworko Value Driverso Value Creationo Measures and Metricso Implementing VBMo Track recordo Conclusion

Contents

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VBM - DefinitionVBM is a managerial process which effectively links strategy, measurement and operational processes to the end of creating shareholder value (CIMA, 2004) VBM is a management approach which put shareholder value creation as the core philosophy of the company (KPMG Consulting, 1999).

VBM is a philosophical concept rather than technique intended to show the financial managers where and when value is created or destroyed within the organisation (Kaushal and Bhargav, 2011)

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Valuation – defines the corporate value and explains the key drivers of value.

Strategy – establishes a clear link between corporate value and specific business strategies.

Finance – describes value enhancing financial policies available to the company.

Corporate Governance – explains the actions and policies of senior management such as performance measurement, compensation systems and investor communication that foster value creation.

VBM - Framework

Generic VBM framework (Morin and Jarrell, 2005)

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Value drivers are variables that affect the company’s bottom line or profit (Koller,1994)

VBM – Value Drivers

Determinants of value of a firm (Morin and Jarrell, 2005)

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Rate of return must be greater than cost of capital – must make profit Increasing stock price Investors confidence

Sustain and leverage on employees intellectual capital Motivation towards company interest and value Build trust

Build trust with external environment and other stakeholders Customers Government & regulatory bodies Community

VBM – Value Creation

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VBM – Value CreationThe relationship between the company, shareholders &

stakeholders

To create the maximum possible value for shareholders the company management must be committed to creating value in relation with customers, suppliers, employees and communities (Niculescu, 1999).

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Firm performance measure should meet the following (Peterson, 2000), Measure must be future oriented Measure should incorporate risk factor Uncontrollable factors to be excluded in the measure

VBM – Measures of Value

The following factors need to be addressed (Peterson, 2000), Measure must be translated to divisional level Measure should be in a flow manner (long process) Measure should promote shareholder value

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Discounted Cash Flow (DCF)

Returns to Shareholders (RTS) - annual capital gains plus dividend yields

Cash Flow Return on Investment (CFROI) - expresses an estimate of a company’s single-period cash flow as a percentage of total investment.

Return on Invested Capital (ROIC) - the ratio of net operating profits less adjusted taxes (NOPLAT) to invested capital

Economic Value Added (EVA) - measures the excess of earnings over the minimum return that shareholders could get by investing capital in companies of similar risk

VBM - Metrics

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Value-creation mindset needs to be adopted (Copeland et al., 1994)

Mindset should tie-up with the necessary management process and systems (Copeland et al., 1994)

Employee compensation to tie-up with performance (Martin and Petty, 2000)

Top management of the firm must fully support the program (Martin and Petty, 2000)

Strategic planning approach – analyse long-term trend

Other stakeholders need to be considered

Implementation of VBM

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Successful implementation by, Coca Cola, GE, Abbott Labs, Merck – has shown

increased in performance & firm’s value (Morrin and Jarrell, 2005).

Perform better than peers

Higher return and value creation

Executives were highly rewarded

VBM – Track Record

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VBM – Track Record

The outcome of adopting VBM: Higher value strategies/ decision which lead to improved shareholder return. Source: Copyright © The LEK/Alcar Consulting Group, Inc. via Morrin and Jarrell (2005)14

o Behavioural -such as getting managers to understand the new measures and avoiding complexity

o Technical - getting the right data, volatility in WACC, the reliability of assumptions

o Organisational - overcoming internal resistance, the significant effort and time required for implementation

o Managerial – support from Top Management

VBM – The Challenges

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Implementation of VBM by various Fortune 100 companies has proven the effectiveness of VBM in creating and increasing firm’s value.

Companies need to adopt VBM with performance measures that is relevant and suitable to their organisations’

Top management support and commitment will ensure ‘smooth’ implementation of VBM

To maintain the competitive edge and continue to create value performance metrics adopted need to be constantly monitored and assessed

Conclusion

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Thank you

Introduced Smart Orange under the GLC Transformation program in 2004

Process includes, Realign Vision, Mission and Business Strategy Restructuring into 2 separate SBUs - Wholesale and Retail Introducing Core Values – Kristal Develop competency model – Functional & Behavioural

Full Top management support and commitment

To continue to create value - Teaming With Passion Program were carried out – compulsory for all staff and Leadership team to attend

Telekom Malaysia

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Telekom Malaysia

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Telekom Malaysia (results)

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Telekom Malaysia (results)

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Telekom Malaysia (results)

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