The art of creating value is not just a discipline for accountants and investors. Used properly, it can be a powerful, perhaps the most powerful, a way that managers can run their companies in an increasingly competitive world. By integrating accounting and performance measures with strategic thinking and day-to-day operations, managers can learn to make decisions that enhance their businesses and add real value.
As knowledge capital becomes increasingly important, traditional financial measures such as earnings and book value are accounting for less and less of a company’s actual market price. Investors are paying great attention to non-financial factors in their efforts to assess the value of corporations. This should be welcome news to managers, who are well aware of the value of ‘‘intangibles’’ such as R&D, patents, trademarks, copyrights, brand names, employee talent, distribution channels, new ideas, and processes.
A well-known example of a great value-creating idea is Wal-Mart’s system that gives its suppliers direct access to its inventory. A customer buys an item at Wal-Mart and the barcode information goes directly to Procter & Gamble, who maintains the inventory. It’s a huge gain in efficiency that gives Wal-Mart the edge over its competitors.
In the USA, the importance of ‘‘shareholder value’’ is almost universally accepted in business. The concept is defined as being not only the ‘‘market value added’’ (MVA) – this is the difference between the stock market capitalization of a company and the capital that has been invested in it – but also growth in employment and high productivity. Although share prices fluctuate, over time they tend to reflect the underlying value of a company.
CEOs and senior managers are expected to focus on creating shareholder value in their corporations. This is not true in the case of Europe and Asia. In these regions, corporations are seen as having other obligations to their communities. Governments often define and regulate a company’s duties towards its ‘‘stakeholders’’. Stakeholders include employees, customers, suppliers, the state, lenders, investors, and the general public. Critics condemn the shareowner price approach as harmful to society as an entire. Rights and obligations of stakeholders are given greater weight. Supporters of the stakeholder system have argued that focusing on shareholder value may hurt the interests of other stakeholders, in particular, the employees of the company.
However, there remain possibilities of counter-argument that most successful companies in any given market would tend to enjoy better productivity, better Market Value Added (MVA) and employ more people than their competitors. MVA is the difference between the market value of its equity and debt and its economic book value of capital. In other words, successful companies are maximizing shareholder value even if they do not explicitly say so. In doing so they are also benefiting, not damaging, the other stakeholders’ interests. Shareholder price implies a stock exchange wherever company shares are wide control by the general public. Company information is less easily available in countries such as Germany and Japan, where shareholdings are concentrated in the hands of institutions. Share costs might not replicate values as closely as they are doing in additional economical stock markets. There is less incentive for managers to strive to create shareholder value. Furthermore, the specter of a hostile takeover does not loom as powerfully as it does in the USA. The USA has a huge market for mergers and acquisitions (M&A) that is partly driven by perceived weaknesses in the current management. Elsewhere, managers may not be as concerned that inefficiency may lead.
