Value based management extends the concept of value for shareholders by focusing on the way that the companies can use it in making strategic and operational decisions. The systems of the value based management have the purpose to reduce the incongruity’s purpose from the investors and managers. The managers can have different interests towards the companies’ owners, for which they work and it is kind of complicated and expansive for the owners to control what the managers do.
In the value based management, the main goal of the company is to create value for the shareholders. That is why the measure and control systems are oriented in establishing the value made in a certain period and of the instruments to raise the value for the shareholders. The value based management wants to improve the process of making decisions in a company, at all levels. It is well known that the types of management ‘from up to down’ can no longer function as they should and that is why, the value based management requires that the managers from all levels use the instruments of measuring the performance based on value, for making better decisions, and for increasing the return of income.
All the definitions of the VBM agree that the value based management has as its primer purpose, to generate as much net worth as possible and to distribute the available resources towards the valuable investment opportunities. Using the value concept for the shareholders has made more popular the appearance of the companies oriented on making value for the shareholders and changing the priorities of the managers. So, instead of the plans based on accounting budgets, the managers are encouraged to evaluate in what way the strategies and operational measures will produce the thing that interests the most the shareholders: obtaining the cash flow bigger than the capital invested.
Tips and comments
In what concerns the value based management, the maximizing of sales, of the market share, the degree of satisfaction of the employees or of the clients do not represent objectives of the company. All of these are important and satisfied only when it helps maximizing the value of the shareholders, which is the target of this kind of corporation. It is very important that the goals of the company, as well as the principles of taking strategic and operational decisions, to be clear. The objectives that promote a vague balance of interests are not suitable for a commercial organization, from a competitive environment. In value based management, the purpose of maximizing the value of the cash flow for the shareholders brings simplicity and direction in the process of making decisions.
Acknowledging the value based management concept by the shareholders has significant effects in the business area. The companies are forced to change the controlling of performance’s systems and to rationalize their activities in order to get the results that the shareholders are expecting. This way, each department becomes profitable or disappears, whether it achieves or not the intention of creating value for the shareholders.