The Value Management Process: A Proposal for Linkage Between Shareholders and Managers

Abstract

Market Value Added (MVA) is an important metric for business in the global environment. Although it is probably the most complex metric available in attempting to provide a linkage between an entity and its performance in value management, there is nevertheless room to improve the usefulness of MVA, and to gain its attendant benefits. The business world is very careful in assessing the cost/benefit trade-off of any management tool. This paper sets out to demonstrate that, in addition to current and long-term financial indicators adopted by an organization, MVA also can be added as an important tool. MVA, however, is still not well understood. Consequently, it is neither well tested nor widely adopted. To improve such understanding, this paper identifies different profiles of a company’s MVA at different times. By combining MVA and market value at any given time, four different profiles (or “corners” in a model) are proposed. These are conceptually defined and analyzed. To provide a reasonable perception of the figures, a combination of trend and sign is considered in the four selected “corners”. The classification of an organization’s results under any of these four alternatives contributes to a better understanding of the metric and provides useful information for shareholders and managers. Because this information is so important for companies—both as an indicator of management performance and as external information for stakeholders and managers—this paper advocates that it must be added to the traditional kit of financial statements (such as balance sheets, profit-and-loss statements, and cash-flow analyses).