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Faculty & Research


Are You (Really) Managing for Value

Working Paper
Intensifying competition, globalizing capital markets, and increasingly active and powerful institutional investors whose managers are themselves engaged in a do-or-die performance battle, are all putting huge pressure on corporations to deliver value to their shareholders, regardless of their corporate or cultural heritage. For senior executives in Seoul, Munich, Toronto, Paris, New York and yes, even Tokyo, delivering shareholder value has become a mandatory and inescapable task. As usual when put to new tests, managers look to emerging management practices to help them respond to their new challenges. In the battle for shareholder value, the savior that managers have turned to is a practice that has become widely known as Value Based Management (VBM). VBM owes its roots to longstanding financial theory, which states that a business creates value only when its returns exceed its cost of capital. The true measure of profitability of a business then is the net profit left over after deducting a charge to account for the cost of the capital utilized1, a measure commonly known as Economic Profit. Starting from this simple premise, consulting firms with significant VBM consulting practices have been engaged in a tussle to establish their specific version of Economic Profit as the "best", in an effort to establish their own market space. This metrics war, which has been ongoing for the past several years, has magnified VBM's financial image among managers even further.

Affiliated Professor of Practice in Strategy