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Today the performance of corporations is judged by their potential to create value rather than their quarterly profits. The profitability of a company in a given period is the result of decisions taken not in that immediate period but in earlier periods and the conditions of the market. The market value of a company, to the contrary, is indexed to the future and not to the past. The market value is proportional to the future value of the cash flows the company is expected to generate and not to the short-term quarterly performance. Moreover, from the shareholders¹ perspective the returns from the quarterly profits is just the after-tax dividend that accrues to them. Whereas their potential to benefit from future rises in value is much higher. In fact, the situation in the American markets where companies that do not distribute dividends reach a market capitalization worth billions of dollars demonstrates that investors are more focused in future values than today¹s.
Since the importance and meaning of value creation for shareholders is higher than short-term profitability, the incentive systems for managers ought to be defined proportionately to their contribution to value creation and not by short-term profitability.
Although the average income of American managers is higher than those in Europe, so is the risk they bear. Whereas in the United States 60% of the executives¹ income is related to performance, this ration is 30% in Europe. Primarily in the United States, but increasingly in Europe as well, value creation is being used to measure performance rather than profitability.
This helps create a commonality of interests between shareholders and management. In the classical setup, the executives who received performance bonuses tended to continually raise capital and to hoard shares without regard to their performance. Rewarding the executives by their performance in value management, on the other hand, leads them to keep only so much capital as needed to get higher returns than alternative investment tools and dispense of inefficient (non-yielding) shares.
The performance of the management is dependent on its success to prepare the firm for the future and not just on quarterly business reports. The Business Excellence Model that is being used as the basis of National Quality Awards, evaluates how systematic the approach to business results is and how sustainable success can be as much as evaluating the results themselves. Business Excellence Model embodies a comprehensive approach. Its adoption as a performance management tool will help firms accomplish sustainable development.
Those systems that do not reward success actually punish entrepreneurship and creativity. Value creation without entrepreneurship and creativity, in turn, is an illusion. On many occasions, opportunity costs that are not accounted for are more important than the actual cost calculation. If we wish our firms to continually create value, then we should make sure that the executives are rewarded through the right type of incentive systems.
The value management service aims to increase the shareholder value of companies by identifying value creating opportunities that maximize their performance and profitability. ARGE provides solutions capable of delivering value over the short term to the client companies through its value management practices.
Project Phases
1. Value Mapping: In the first phase, the current value of the company is measured, including the key value drivers, and the improvement opportunities are defined.
2. Creating Value: In the second phase, strategies are identified on the business units scale, and implementation plans are structured. After those detailed analysis, the changes necessary to optimize the functional components of your company’s value and achieve business excellence are identified.
3. Making Value Consistent: In order to increase the value of the company consistently and create a culture change that supports value consistency, the planning and budgeting priorities are streamlined and compensation plans are set. A communication system is also enabled to inform company’s shareholders consistently about those changes.
4. Turning Value into Cash: The value of the company can be turned into cash through either going public or block sale, which enables shareholders gain higher benefits from the increase of company’s value.
Benefits of Value Management Service
- Enhances corporate transparency.
- Increases value creation consistenly.
- Improves internal communication.
- Sets clear and aligned goals.
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