Value based management in current corporate environment

Wrote a whole 90 page thesis during my MBA days on value based management in telecommunciations technology and service companies e.g. Nokia

Wrote an article recently on my learning form those days fitting the current market environment......

VALUE BASED MANAGEMENT IN CURRENT CORPORATE ENVIRONMENT

The Mumbai stock market BSE index which was 20300 on January 1, 2008 dipped to 9903 on January 1, 2009. The market having witnessed the sharp correction is now bravely fighting the corporate scandals.

The market which corrected the euphoria of accounting earning increases and excess capital inflow have to now tackle with the corporate managers solely focused on keeping quarterly earning increase as high as possible to prove that they are the best stewards of the company’s assets.

The market refused to be deceived in the past by accounting techniques to improve earnings and took the sophisticated approach of associating improved long term cash flow with respective share prices and responded with the due correction in share prices.

Now, there might be number of other companies who may take hint from Satyam and try to write off bad investments, despite the negative short term earnings impact. In such cases, the market shall not arbitrarily penalize companies but understand the value drivers of these companies (both over time and compared with other companies), which can help develop insights into the free cash flow generation and likely value creation in future.

The corporate executives shall also overcome the limitations of traditional accounting based financial statements and try to maximize their shareholder returns (which in turn stimulates maximizing of return to all other stakeholders) while improving the organizational effectiveness and strategic position related value drivers of their company.

The economic framework based on stock market value is only one of the tool managers should use to make effective management decisions. The strategic and organizational value drivers need to be considered as well and communicated (with due attention and within competitive limits) to security analysts and investors for them to make sensible decisions.

The key strategic value drivers are unique products or services, scale economics, sustainable cost advantages and access to capital. Similarly, organizational value drivers are corporate governance, strategic planning, resource allocation, and performance management and top management compensation.

The area that is often overlooked and need major focus in current Indian economic and corporate environment is adoption of rigorous process to generate the better options (the value drivers that have the highest potential for creating new wealth) and implement only the best options which create high value. Such processes help the company gains tremendous organizational advantage over its rivals. The company work smarter by focusing more effectively on increasing good growth and eliminate time and resource wasting investments in bad growth strategies.

Empirically, the process oriented approach to key value drivers not only result in wealth generation but also results in highly confident management team with winning attitude, superior work force (culture that attract and hold top talent at all level), strong balance sheet that allows the funding of good growth opportunity and an institutional capacity for continually improve performance and meet new challenges.

Interestingly, such value drivers exist in some form in all companies but they are largely underutilized and ineffective in helping the company achieve superior performance. When these carefully designed value drivers are linked to the company’s objective, integrated into common overall process (for dealing with important organizational and strategic decisions) and the other processes (governance, strategic planning, resource allocation, budgeting, and top management compensation), they becomes the co-coordinated elements of a single integrated approach to wealth creation for all stakeholders and help avoid corporate pitfalls that we see nowadays.

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The views expressed are personal.