Driving shareholder value managing for the new millennium
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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

Driving Shareholder ValueManaging 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

FI 8360Lecture #2 Roadmap

  • Why Value Value

  • Value and Capital Markets

  • The Value Manager

  • Valuation Frameworks: DCF

    • NPV, FTE, FCF, APV, etc.


Driving shareholder value managing for the new millennium

Why Value Value?


Economic 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

Timing

Risk

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

Corporate Value

infinity

Value = Cash Flowt

t=0 (1 + Cost of Capital)t


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

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

  • Cash Flows

  • Long-Term Expected Performance

  • Risk


What is vbm

What is VBM?

  • A Way of Thinking

  • A Process for Planning and Execution

  • A Set of Tools


So what is so different

So What is So Different?

Drivers of Value

new

old

Cash Flow

Growth

VALUE

newer

??

Asset Utilization

Sustainability


Investor perspective vbm links all management decisions to the maximization of shareholder value

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

Strategy

Formulation

Incentive

Compensation

Corporate

Development

Value-Based Management

Performance

Measures &

Inf. systems

Financial Policies

& Practices

Employee & Investor

Communications


Driving shareholder value managing for the new millennium

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

Evolution of VBM

Number Crunching

Strategizing

Integrating

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

Benefits of VBM

  • Better Pay

  • Better Decisions

  • Better Morale

  • Better Performance


What s in it for me

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

Challenge to Create Value

  • Curse of competition

  • Curse of beating market expectations


Potential rewards

Potential Rewards


Growing pressures from sources of discipline

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

    Origination of Value Movement

    Changing Economics

    Competition

    Ruthless

    Capital Markets

    Speed-driven,

    Customer driven

    Markets

    VBM

    Technological Innovation

    Information

    Availability


    Institutional pressures

    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

    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

    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

    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

    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

    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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