Value Based Management an der LMU München

Return on capital (ROIC) > Cost of capital (Marshall, 1890)

Maximizing the share price for current and future shareholders

Yes, 

Empirical evidence: companies with long term value goals create more value.

--> TRS = value

--> R&D investments = short/long - term value goals

Investments in R&D correlate positively with long-term total returns to shareholders (TRS)

• No actions that increase today’s share price but reduce future prices
  --> e.g. reducing product quality increases today's share price but lowers future one
• Not focusing on growth at the expense of returns
  --> e.g. Wework wanted to grow fast and lost returns by renting offices cheaper than they costed

1. For companies:

• Discourages activities with positive benefits in the short term and negative in the long
  term.
• Encourage activities that create long term value.

2. For the economy:

• Firms tend to engage in a higher level of corporate responsibility, e.g., they increase employment and the economy is more robust.

E.g., managers could get rid important marketing expenses and claim being more efficient.

--> investors cannot verify the claim.

--> asymmetry in information between managers and shareholders can lead to differences in the stock price in the short term versus long term

1. Earnings can be positive and growing but 

return on capital (ROIC) < cost of capital
2. Neglects that value is created only if 

return on capital > cost of capital

1. Neglects other stakeholders
   --> True for short term focus

   --> Wrong for long term: no value creation without happy customers, suppliers and employees

2. Inequality and unsustainable growth

   --> If regulation is adequate => only long term shareholder value consistent with e.g., sustainable growth

   --> True if regulation flawed

Best Buy:

investment in female employees reduced women turnover 

and helped female employees build leadership skills that benefit the firm

Focus on long-term value creation

=> Best for resource allocation and health of economy

• Save cost by underpaying employees and not investing in a safe working environment
• Lower quality employees
  => lower product quality, lower customer demand,
  reputation damage
• More injuries, illness and employee turnover
  => more union pressure and higher training costs

Solution:

1. Stakeholder approach: 

Treating stakeholders equally well => does not answer how much to pay employees

2. Shareholder approach

Wages enough to attract quality employees and keep them happy and productive