VBM an der TU München

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

Maximise value to shareholder vs. maximise value to all stakeholders

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

• 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

(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.

• 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

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

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

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

=> Managerial decisions difficult to evaluate as in shareholder view

Top value creators = most admired companies
Innovation

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

Companies that treat employees good 

=> more and better patents 

=> higher stock and higher future return

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