Value-Based ManagementEssay Preview: Value-Based ManagementReport this essayTodays 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 what shareholders would expect. In that sense the view from the shareholders may be in conflict with the view from management. When disagreements occur between management and stockholders, such conflict is known as agency problem. The agency problem may also arise between top management and junior management and lower level employees. As is the case between top management and shareholders, employees may seek goals that might differ from the shareholder’s goals and even with the management goals. For example, an employee may want to follow his career path in another department and puts pressure to move from his current position. That may be in conflict with the interests of his current manager to keep him in that position for a longer period because he will have a hard time finding a replacement immediately. Another example could be if the employee seeks the benefit of being a top manager but on his way of doing so he might align his goals towards management goals instead of maximizing shareholder’s value. This problem could also be solved by close monitoring and by compensation packages tied to share performance.
The agency problem can be solved by the alignment of management’s interests with shareholders interest. A way to do this is to tie managerial and employee compensation not only to financial performance of the firm but to the value of the company’s shares. This will increase the incentive of management and employees to maximize the value of shares, thus the value of shareholders wealth. Also, close monitoring of management by the board of directors and monitoring of employees by managers can determine if their performance is on the best interest of shareholders. If they are following their best interest and the company is not performing as expected or even worst they will be replaced (either by the board or by external management from a hostile takeover).
The Best of CIOs. We are all the CEO of a company and our job comes from recognizing the problems with the company. There is an effort of management to take away your best interests by treating you the worst. Our goal is to improve your position as a CIO who cares about the future of the company.
In the short term, we can help companies manage their employees better.
For example, if we start a business we want all the managers we work with to work with us as leaders. That makes each company better, making the whole company grow and the best of the company more sustainable. In the long term, our goal is to help companies manage their employees better as well and to get them up-to-date on business. I am also a former CMO of some companies. But I am a big fan of managers and I see managers as more equal and to a better degree than they are today – a goal I believe we have to strive for!
I believe today’s managers need to be the best part of their company. And if they are not the best part, where should we put their best-performing employees? I could not learn from my grandfather what to do in the business and instead worked at a management consulting firm as a consultant. How many people should we hire to make up for all those years, all those hours, and all those months spent in the company? We need to hire engineers to do all kinds of engineering, to do computer vision, to do accounting for our taxes, to do some research, to understand the data our services provide. That is a real problem of our time now. But where should we start?
It would be better if each company was able to work more effectively together. It would also be better to make it possible for each person to meet their requirements for each position.
But there is no guarantee that you are a good engineer for any job. An engineer needs to work fast, be a hard worker, manage time well, and deal with hard decisions. We must be prepared for this challenge and provide solutions that reflect value to our customers.
When I said I would never hire any of the big managers, I was referring to a general manager of a big company that is not a problem. That general manager has no experience on the large operations division. He didn’t know how to run his company, he didn’t have a network and was not a great help for employees. I believe that this general manager has a deep understanding of their business models and is willing to deal with things without a lot of money (in comparison to the senior management type). This general manager will also recognize that they have only one thing in common. They understand the business model better than I do so they don’t shy away from dealing with things that are not as good as others.
The general manager must have experience in working with other managers. For example, there is no problem with the general manager of a big company who is working hard