Light and shadow on value based management

The rapid spread of the principle of the creation of value for shareholders has led to the need to identify new instruments. Value Based Management (VBM) is a system for management methods that aims to maximize the gap between the firm’s market capitalization and its own capital. VBM identifies the most efficient methods for making decisions, allocating resources, controlling and paying management, developing techniques for determining the quantitative measures to use, and identifying the variables management can influence in order to create value and estimate the amount of the future value that is created. The ultimate aim is to ensure that at each level of the organization management is induced to act as if it were the owners of the firm. Of fundamental importance is a programme of communication that ensures that the importance of Value Based Management is spread to the entire personnel of the organization, thereby guaranteeing their participation in the achievement of objectives. This communication requires careful planning; the spread of information must occur at three levels: top management, senior operating management, managers and all the personnel inside the firm. There have always been a large number of criticisms of Shareholder Value and of Value Based Management: other stakeholders have been damaged in various ways, many managers have been able to amass large personal fortunes, the “value drivers” are all financial factors (free cash flow, initial capital, the expected return of shareholders), and management decisions have often turned out to be disadvantageous for the firm’s long-term interests. The drastic reversal of fortunes of the stock markets, the financial scandals and convictions of managers responsible for the bankruptcies of large firms have all contributed to negate the successes previously achieved. In this way VBM has been shorn of a good deal of its usefulness.