Join now to read essay Vbm
Todays business world is characterized by increasing change – technological, cultural, economic and personal changes. The net effect of these changes is increased anxiety, insecurity and stress for employees, managers, and business owners and other stakeholders. The ability to adapt, change or even reinvent an organization is critically important to meeting the challenges of a competitive marketplace whether domestically or internationally. How do you reduce and/or alleviate anxiety, insecurity and stress? One must implement a values-based management in the organization. Numerous studies have been conducted over the years and most have concluded that a need exists for organizations to be managed by a common vision, purpose and set of values. The following essay outlines the meaning of value-based management, agency cost, and implementation of value-based management, its benefits and detriments as well as various valuation methods.
Today’s business world shows a huge diversification in the shareholders of one company. In most countries, each investor only holds a very small fraction of issued shares by one corporation. This also includes the senior management. Determining the objectives of the firm is not necessarily a straightforward task because the typical firm will have many types of stakeholders. Among these stakeholders are customers and suppliers, shareholders and creditors, managers and employees, as well as government and a variety of other special interest groups. More likely than not, the objectives of these different types of participants will be in conflict.
The main objective of every firm and its members is to make money and maximize the value. This goal is a little bit vague and may encompass various aspects and multi level concepts, so we will try to give a more accurate definition. The money making and value adding can occur through multiple ways such as maximization of market share, risk reduction, minimization of cost, steady growth perpetuation and of course profit maximization. Each and every one of those can be accomplished in various ways. Market share can be increased by lowering the prices on products and services. Costs can be minimized by avoiding too much spending on research and investment in new technologies. Risk reduction can be accomplished by not taking any risks. With all this being said, there still some uncertainty as to whose value should the firm maximize. The answer is simple: it should be shareholders value. Management acts in the shareholder’s best interests by making decisions that continually increase the value of the stock. Thus, management’s goal is to maximize existing stock’s value per share.
As mentioned earlier, the ownership of large corporations is spread over large number of stockholders. Shareholders and the board of directors (designated by shareholders) appoint the management team that will be in charge of managing the firm in the most efficient way and meeting with shareholder expectations and interests. From the perspective of shareholders, the managerial function is simply to maximize shareholder wealth, thus they are expected to act on behalf of the interests of shareholders. Because of such distribution of ownership, the management controls the firm. This brings up another question: does management actually act on the best interest of the shareholder? The main conflict comes when other members of the firm or other stakeholders try to maximize their own expected wealth. That objective could not be aligned with the main objective of the firm. For example, a manager that runs a not so profitable department will lobby for allocation of funds to his department, even if he knows that those funds could be better off in other department. An employee may extend its workday beyond the regular scheduled hours in order to accumulate overtime and thus pursue his or her personal goal of increasing the value of paycheck. It is possible to establish a set of general goals that the management may expect from their managing position like higher management compensation, job security, maximizes company’s profit, maximize market share of the company or even survival of the firm. They can also view their position as a chance to improve their personal status: having a company car or a nice furnished office.
One can argue that the main goal of management is to maximize the value of the firm. But that doesn’t necessarily mean that shareholder value is going to be maximized. Wealth of stockholders could be a function of the value of their stock and the dividends the firm pays for that stock. If management aims at maximizing firm value, it is very likely that they will set a low dividend payout ratio in order to reinvest the most part of their earnings. The dividend payout will be lower than