VBM at TU München

Flashcards and summaries for VBM at the TU München

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Study with flashcards and summaries for the course VBM at the TU München

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Higher Pressure of capital markets on companies

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Shareholder Value vs. Stakeholder views

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Shareholder View

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Stakeholder View

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Questions for value maximisation

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Issue 2: Value Maximization makes society better off

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VW Challenge value maximisation

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Adidas during corona

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Stakeholder theory: Decision Making (Issues)

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Shareholder value creation <-> Reputation

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Value creation <-> Employee focus

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Allianz Targets => Value Creation

5 levers and 4 targets

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Exemplary flashcards for VBM at the TU München on StudySmarter:

VBM

Higher Pressure of capital markets on companies

Greater institutional investments

- growth of capitalised pension funds due to ageing society

=> Portfolio managers withdraw money from companies without competitive returns


Menace of hostile takeovers

- EU firms learned to communicate and satisfy demand of investors

- Increasing acceptance for firms to consider other stakeholders

VBM

Shareholder Value vs. Stakeholder views

Maximise value to shareholder vs. maximise value to all stakeholders

VBM

Shareholder View

Maximize the market value of a firm
(single objective)
Shareholder is residual claimant on
the company


Supported by a powerful theoretical
result: Social welfare is maximized, when
all firms in a society maximize their
own firm value


But: strong assumptions necessary


Maximize the market value of a firm
(single objective)


Shareholder is residual claimant on
the company
¨ Supported by a powerful theoretical
result:
Social welfare is maximized, when
all firms in a society maximize their
own firm value
¨ But: strong assumptions necessary

VBM

Stakeholder View

  • Stakeholders are all parties that
    are affected by a firm‘s actions,
    e.g. shareholders, customers,
    suppliers, workers, local
    communities
  • All stakeholders have claims on the
    company
  • Multiple objectives:
    Which one is relevant?
    Conflicting objectives?
  • Stakeholder value approach does
    not provide a guideline for
    managerial decision making

VBM

Questions for value maximisation

(1) Should firms have a single-valued objective?
o Value maximization: single-valued objective
o Stakeholder value maximization: multiple objectives
(2) If so, should that objective be value maximization or something else?
Possible objectives:
o Maximizing (shareholder) value,
o Maintaining employment,
o Improving the environment, etc.

VBM

Issue 2: Value Maximization makes society better off

  • Social welfare is max, if firms max firm value
  • Assumptions:
    • No monopolies 
    • Perfect markets 
    • No externalities
  • Firms use inputs (labor, capital, material) for outputs (goods/service)
  • Social welfare is increased, if the prices > costs 
  • As long as the firm maximizes its profits (revenues - costs), social welfare is maximized
  • If the assumptions don't hold, the corporate objective of value maximization must be
    carefully analyzed

VBM

VW Challenge value maximisation

Loss in the market capitalization of about
€ 15.8bn1) in the short term after the
publication


Barrett et al. (2015) estimate the
social costs due to health impacts by US$ 450m.
=> Implications for shareholder value approach


A narrow focus on exclusively financial KPIs and
short term value creation can set incentives to
ignore other important fields such as quality
and sustainability in company’s success.
=> The goal of value maximization must always be from a long term perspective

VBM

Adidas during corona

Situation:
German retail company Adidas stops paying rent for
its stores, which are closed due to the Covid-19 crisis
n Some weeks earlier, Adidas published its financial results of 2019: record year with
profits of € 1.9bn (+12%), major increase in dividends and share-buyback
Assessment and public reaction:
n Myopic decision benefitting the shareholders at the expense of landlords
n Significant reputational damage and extensive criticism by society, politicians and press,
even calls to boycott Adidas
No long-term value-maximizing strategy, arguably not even for shareholders
Result and takeaway
Adidas apologizes and pays rent again1)
Shareholder value is not yet dead, but stakeholders and society can put immense
pressure on a company

VBM

Stakeholder theory: Decision Making (Issues)

  • Competing interests 
  • Decision criteria has to guide tradeoffs
  • Stakeholder theory doesn't provide criterion

=> Managerial decisions difficult to evaluate as in shareholder view

VBM

Shareholder value creation <-> Reputation

Top value creators = most admired companies
Innovation

  • Quality of management
  • community and environmental responsibility
  • ability to get people
  • quality of product

VBM

Value creation <-> Employee focus

Companies that treat employees good 

=> more and better patents 

=> higher stock and higher future return

VBM

Allianz Targets => Value Creation

5 levers and 4 targets

5 levers:

  • Customer centricity
  • Digital by default
  • technical excellence
  • Growth engines
  • inclusive meritocracy 


Targets:
- Growth
- RoE
- Net Promoter Score (Customers centricity)
- Inclusive Meritocracy Index (IMIX) = culture where people & performance matter

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