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Driving Shareholder Value Managing for the New Millennium

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

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  1. Driving Shareholder ValueManaging for the New Millennium Dr. Roger A. Morin Georgia State University, Distinguished Professor of Finance Chairman & CEO Utility Research International

  2. FI 8360Lecture #2 Roadmap • Why Value Value • Value and Capital Markets • The Value Manager • Valuation Frameworks: DCF • NPV, FTE, FCF, APV, etc.

  3. Why Value Value?

  4. 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.

  5. Corporate Value infinity Value = Cash Flowt t=0 (1 + Cost of Capital)t

  6. Shareholder value analysis focuses on the factors that investor use to value companies: • Cash Flows • Long-Term Expected Performance • Risk

  7. What is VBM? • A Way of Thinking • A Process for Planning and Execution • A Set of Tools

  8. So What is So Different? Drivers of Value new old Cash Flow Growth VALUE newer ?? Asset Utilization Sustainability

  9. 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

  10. VBM plays a significant role in each stage of the management process Business Planning Resource Allocation Performance Management Portfolio Assessment Financial Policy Assessment

  11. 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

  12. Benefits of VBM • Better Pay • Better Decisions • Better Morale • Better Performance

  13. What’s In It For Me? • Your stake in the company becomes more valuable • Opportunity to learn new skills • Job creation

  14. Challenge to Create Value • Curse of competition • Curse of beating market expectations

  15. Potential Rewards

  16. 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

  17. Origination of Value Movement Changing Economics Competition Ruthless Capital Markets Speed-driven, Customer driven Markets VBM Technological Innovation Information Availability

  18. 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

  19. 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

  20. 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: ????

  21. 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

  22. How to reduce the agency problem • Large ownership positions • Compensation tied to shareholder return • Threat of takeovers • Competitive labor markets for corporate executives • VBM

  23. 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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