Value Based Management with Corporate Social Responsibility

✍ Scribed by John D. Martin, J. William Petty, James S. Wallace

• Publisher: Oxford University Press, USA
• Year: 2009
• Tongue: English
• Leaves: 209
• Series: Financial Management Association Survey and Synthesis
• Edition: 2
• Category: Library

✦ Synopsis

As the first decade of the 21st century winds down we have seen a sea change in society's attitudes toward finance. The 1990s can best be described as the decade of shareholder supremacy, with each firm trying to outdo the other in their allegiance to shareholder value creation, or as it came to be known, Value-Based Management (VBM). No one seemed to question this culture as the rising firm valuations translated into vast wealth creation for so many. Three significant economic events have reshaped how the public feels about an unbridled devotion to VBM and have defined the last decade: the dot.com bubble in 2000, the infamous accounting scandals of 2001, and the collapse of the credit markets in 2007-2008. In all three of these events the CEOs were portrayed as reckless and greedy and Wall Street went from an object of admiration to an object of scorn. The first edition of this book, Value Based Management: The Corporate Response to the Shareholder Revolution was written to help explain the underpinnings of Value-Based Management. At the time of its publication, few questioned whether the concept was the proper thing to do. Instead, the debate was focused on how to implement a VBM program. With this new second edition, the authors look at VBM after having seen it through good times and bad. It is not their intent to play the blame game or point fingers. Nor is it their intent to provide an impassioned defense of VBM. Instead they provide an academic appraisal of VBM, where is has been, where it is now, and where they see it going.

✦ Table of Contents

Contents......Page 10
Part I: Value-Based Management, Corporate Social Responsibility, and the Purpose of the Corporation......Page 16
1 The Purpose of a Corporation......Page 18
Adam Smith and the Invisible Hand......Page 19
A Stakeholder Perspective......Page 20
Value(s)-Based Management: A Middle Ground......Page 21
Summary: Creating Firm Value—Think Value(s)-Based Management......Page 23
Appendix 1A: John Mackey and Milton Friedman on the Goal of the Firm......Page 26
2 The Elements of Value-Based Management......Page 30
Wealth Creation Is Not Universal......Page 31
The Proper Design of a V[sub(s)]BM Program......Page 33
Alternative Valuation Paradigms: Earnings versus Discounted Cash Flow......Page 35
Connecting Business Strategies with the Creation of Firm Value......Page 36
Summary......Page 37
3 The Need to Measure What You Want to Manage......Page 39
The Need for a Single Metric......Page 40
Total Shareholder Return......Page 42
Total Market Value......Page 43
Accounting-Based Metrics......Page 44
Think Economic Profits, Not Accounting Profits......Page 45
Summary......Page 50
Appendix 3A: Accounting versus Economic ROIC......Page 52
Appendix 3B: More Problems with Accounting-Based Metrics......Page 55
Part II: The Finer Details of Value-Based Management and Corporate Social Responsibility......Page 60
4 Free Cash-Flow Valuation: The Foundation of Value-Based Management......Page 62
The Beginning for Value-Based Management: Free Cash Flows......Page 63
Free Cash Flow and Firm Valuation......Page 68
Determining the Discount Rate......Page 76
The Value Drivers: Digging Deeper......Page 78
Summary......Page 81
5 Pick a Name, Any Name: Economic Profit, Residual Income, or Economic Value Added......Page 82
The Fundamental Concept: Residual Income or Economic Profits......Page 83
“Fine-Tuning” Residual Income with EVA......Page 88
More Than a Financial Exercise......Page 100
Summary......Page 104
Appendix 5A: The Equivalence of the Residual Income and Discounted Dividends Valuation Approaches......Page 106
Appendix 5B: An Illustration of the Computation of EVA......Page 108
Appendix 5C: Performance Evaluation Using CFROI......Page 114
6 Corporate Social Responsibility: Putting the S in Value(s)-Based Management......Page 116
The Economic Argument for CSR......Page 117
CSR within a VBM Framework: The Academic Evidence......Page 119
Driving the Value Drivers......Page 121
Summary......Page 129
Part III: VBM Applications......Page 132
7 Project Evaluation Using the New Metrics......Page 134
Traditional Measures of Project Value......Page 135
Fixing the Problem......Page 137
Summary......Page 140
Appendix 7A: The Equivalence of MVA and NPV......Page 145
8 Incentive Compensation: What You Measure and Reward Is What Gets Done......Page 146
All-Too-Common Mistakes......Page 149
Creating a Culture of Ownership......Page 152
Determining a Firm’s Compensation Policy......Page 155
Managerial Decision Horizon and the Use of EVA......Page 159
Extending Managerial Horizons......Page 163
How Should Employee Compensation Be Structured?......Page 164
Fairness as an Additional Characteristic of a Firm’s Compensation Policy......Page 165
Summary......Page 166
Appendix 8A: Whole Foods Market Executive Compensation Discussion and Analysis......Page 168
Part IV: Lessons We Have Learned......Page 174
9 Lessons Learned......Page 176
VBM Studies Based on Archival Data......Page 177
VBM Studies Based on Survey Data......Page 178
More Recent Survey Evidence......Page 181
Current CSR Research......Page 184
Summary......Page 185
Epilogue: Where We Are Now......Page 188
Notes......Page 194
References......Page 200
C......Page 206
H......Page 207
R......Page 208
Z......Page 209