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Driving Shareholder Value Managing for the New Millennium. Dr. Roger A. Morin Georgia State University, Distinguished Professor of Finance Chairman & CEO Utility Research International. FI 8360 Lecture #2 Roadmap. Why Value Value Value and Capital Markets The Value Manager

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Driving Shareholder Value Managing for the New Millennium

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Driving Shareholder ValueManaging for the New Millennium

Dr. Roger A. Morin

Georgia State University, Distinguished Professor of Finance

Chairman & CEO Utility Research International

FI 8360Lecture #2 Roadmap

  • Why Value Value

  • Value and Capital Markets

  • The Value Manager

  • Valuation Frameworks: DCF

    • NPV, FTE, FCF, APV, etc.

Why Value Value?

Economic Value

Cash flow and Risk

Future value corresponds to future and uncertain business cash flows, Ct. So we discount expected cash flows

n E(Ct)

Present Value = -------------

t=0 (1 + k)t



Because business cash flows occur over many future periods, we locate them in time, then discount and add them all.

Because business cash flows are risky, investors demand a higher return: the discount rate, k, contains a risk premium.

Corporate Value


Value = Cash Flowt

t=0 (1 + Cost of Capital)t

Shareholder value analysis focuses on the factors that investor use to value companies:

  • Cash Flows

  • Long-Term Expected Performance

  • Risk

What is VBM?

  • A Way of Thinking

  • A Process for Planning and Execution

  • A Set of Tools

So What is So Different?

Drivers of Value



Cash Flow





Asset Utilization


Investor PerspectiveVBM Links All Management Decisions to the Maximization of Shareholder Value







Value-Based Management


Measures &

Inf. systems

Financial Policies

& Practices

Employee & Investor


VBM plays a significant role in each stage of the management process

Business Planning

Resource Allocation

Performance Management

Portfolio Assessment

Financial Policy Assessment

Evolution of VBM

Number Crunching



Mid ‘80’s

Mid ‘90’s

2000 -

  • RHS Balance Sheet

  • Finance

  • Raiders

  • Valuation Models

  • LBO’s

  • Divestitures

  • Junk Bond Mkt

  • Holistic, Integrated

  • Investor Perspective

  • Common Language

  • Shared Culture

  • Executive

  • Compensation

  • Performance

  • Evaluation

  • LHS Balance Sheet

  • Internal Operations

  • Strategy Evaluation

  • Financial Approach to

  • Strategic Planning

Benefits of VBM

  • Better Pay

  • Better Decisions

  • Better Morale

  • Better Performance

What’s In It For Me?

  • Your stake in the company becomes more valuable

  • Opportunity to learn new skills

  • Job creation

Challenge to Create Value

  • Curse of competition

  • Curse of beating market expectations

Potential Rewards

Growing Pressures From Sources Of Discipline

  • Product market

    • Globalization, technology, deregulation, digital economy,

  • Market for corporate control

    • Threat of takeovers

  • Capital markets

    • Creditors, shareholders

  • Market for skilled managers

  • Origination of Value Movement

    Changing Economics



    Capital Markets


    Customer driven



    Technological Innovation



    Institutional Pressures

    • Demonstrated ability to improve performance

    • Increasing attention on competitive advantage and competitive strategy

    • Accountability

    • Internal control mechanisms

      • Activist boards and investors

  • Business scorecards

  • Demise of Accounting Metrics

    • Accrual accounting undependable

    • Accounting latitude

    • Risk excluded

    • Investment requirements excluded

    • Dividend policy excluded

    • Time value of money excluded

    • EPS growth vs value unrelated

    • Focusing on short-term earnings growth jeopardizes ability to create long-term value

    • Accounting model vs Economic model

    Decision-Making in a Corporate Tower of Babel

    • Capital Budgeting: NPV, Cash Flow

    • Performance Evaluation: ROE, ROI

    • Investor Relations: EPS, growth

    • Incentive Bonus: ROE, Cash

    • Strategy: ????

    The Agency Problem

    • Managers act in their own self-interest (corporate jets, country clubs, perks, etc.)

    • Shareholders do not have the influence or finances to govern issues such as election of board members

    • Board members tend to be largely responsive to management; top managers are often board members

    • Manager’s time horizon may be short-term, due to compensation mode

    • Managers tends to have lower risk tolerance than owners due to compensation mode

    How to reduce the agency problem

    • Large ownership positions

    • Compensation tied to shareholder return

    • Threat of takeovers

    • Competitive labor markets for corporate executives

    • VBM

    Contributions of VBM

    • Enhance value for shareholders

    • Enhance your company’s competitive position in:

      • Product markets

      • Market for corporate control

      • Capital market

    • Optimize all stakeholders’ interests

    • Better pay, better performance, better morale, better decisions

    • Manage assets better

    • Close the gap between operations, strategy, finance

    • Think, act, get paid like an owner

    • Communicate more effectively with investors

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