Value-Base Management

Some research was conducted by Professor of Finance and Insurance, Emery Trahan from Northeastern University College of Business Administration on value-based management. Below is an abstract and an introduction from the research piece.

We examine the performance of 84 firms that adopt value-based management (VBM)
systems during the period 1984-1997. The typical firm significantly improves matched-firmadjusted residual income after adopting VBM. This improvement persists for the five postadoption years studied. After controlling for possible sample bias, we find that large firms show less improvement than small firms. We find a negative relation between tying compensation to VBM and post-adoption performance. We also find that firms reduce capital expenditures following VBM adoption, but that the reductions in spending do not differ based on the firms’ growth opportunities. Overall, the evidence suggests that VBM improves economic performance and the efficient use of capital.

Effective corporate governance and financial control includes the use of monitoring and incentive mechanisms to align divergent interests between shareholders and managers and encourage the creation of shareholder value. Value-based management
systems (VBM) provide an integrated management strategy and financial control system intended to increase shareholder value by mitigating agency conflicts. In concept, VBM reduces agency conflicts and helps create shareholder value since it reveals value increasing decisions to employees, allows for easier monitoring of managers’ decisions, and provides a method to tie compensation to outcomes that create shareholder value.