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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.

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



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


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? investor use to value companies:

  • A Way of Thinking

  • A Process for Planning and Execution

  • A Set of Tools

So what is so different
So What is So Different? investor use to value companies:

Drivers of Value



Cash Flow





Asset Utilization


Investor perspective vbm links all management decisions to the maximization of shareholder value
Investor Perspective investor use to value companies:VBM 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
Evolution of VBM process

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
Benefits of VBM process

  • Better Pay

  • Better Decisions

  • Better Morale

  • Better Performance

What s in it for me
What’s In It For Me? process

  • Your stake in the company becomes more valuable

  • Opportunity to learn new skills

  • Job creation

Challenge to create value
Challenge to Create Value process

  • Curse of competition

  • Curse of beating market expectations

Growing pressures from sources of discipline
Growing Pressures From Sources Of Discipline process

  • 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 process

    Changing Economics



    Capital Markets


    Customer driven



    Technological Innovation



    Institutional pressures
    Institutional Pressures process

    • 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 process

    • 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 processCorporate 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 process

    • 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 process

    • Large ownership positions

    • Compensation tied to shareholder return

    • Threat of takeovers

    • Competitive labor markets for corporate executives

    • VBM

    Contributions of vbm
    Contributions of VBM process

    • 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