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A few decades ago there was considerably less knowledge about the
shareholder value and a great deal more skepticism about its relevance to
corporate governance. It was anticipated that over a decade, with the surge of
liberalization, globalization and privatization, the notion of maximization of
shareholder value would more likely than not become a global standard for the
measurement of a business’ financial performance, and that this idea would soon
make its way across the globe. During the 19th Century, the term
‘Value-based Management (VBM)’ was not known and focus was on just efficiency
and increasing productivity. Value-based Management (VBM) Methods gradually advanced
using improved transportation and communication mechanisms. These systems were
then aimed at promoting and evaluating the efficiency and productivity of
decentralized production processes and not yet on measuring and managing value
creation as such. At the end of the 19th Century, Alfred Marshall
propounded profit as the residual income accruing to a firm’s owner as a return
to the investment of his own capital and to the pains he suffers in exercising
his ‘business power’ in planning, supervision and control in the 1890s. In late
1970s, theorists and practitioners including Joel Stern and Alfred Rappaport
advocated a stronger link between the creation of shareholder value and the way
companies were managed. This approach to performance management became known as
Value-based Management (VBM). The original, powerful idea behind Value-based
Management (VBM) was to align the company’s measurement system with economic
value creation in a way that traditional accounting-based measurement systems
did not. The focus of these early programs was ensuring that the measurement
system fully took into account the cost of capital tied up in the business.

 

In recent years, management consulting firms have started offering
companies advice on how to increase their shareholder’s value owing to the fact
that the existing business models will soon become unfounded. In order to craft
a wealth creation framework, companies are relying more and more on the capital
markets, acquisitions and restructuring while they should be focusing on how to
create, measure and manage their own ‘values’ by evaluating specifics like how
the market attaches value to their businesses and how should they compensate
their stakeholders that would make their employees think and act like owners. This
hunt for performance measures which could measure the shareholder’s value
creation became the holy grail of the rapidly growing literature on Value-based
Management (VBM). In the light of corporate governance, even the owners now
demand accountability from their corporate executives who are expected to
justify their compensation levels owing to the manifestations of the increased
assertiveness of shareholders. However, executives are also concerned with self-preservation.
They know that weak financial performance is unacceptable and has motivated
many executives to better understand the importance of measuring and managing
shareholder expectations.

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