Value Based Management (VBM)

“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.” (Albert Einstein 1879 – 1955, American theoretical physicist)

Definition of VBM Creating Value Managing for Value Measuring Value VBM is a management approach that ensures corporations are run consistently on value (normally for maximizing shareholder value).

Aim of VBM Organizations serve a purpose. They exist to deliver certain value(s). Organizations normally use considerable amount of time, effort, investments, assets and resources. So it makes good sense to ensure, manage, measure, monitor, encourage and support that maximum value is realized.

Benefits of VBM - maximizes value creation consistently - prevents undervaluation of the stock - sets clear management priorities - facilitates to improve decision making - helps to balance short-term, mid-term and long-term trade-offs - encourages value-creating investments - improves the allocation of resources

Keywords in VBM Intangible asset Intangibles Intellectual capital Knowledge assets …………… they are more or less synonyms. An asset is a claim to future benefits (value, cash flows). An intangible asset is a nonphysical claim to future value or benefits.

Characteristics of Intangible Assets Upside, value-increasing characteristics: - Intangible assets are non-scarce. - Intangibles increase in value when used. - Intangibles have strong network effects. - Intangibles create future value.

Characteristics of Intangible Assets B. Downside, value-decreasing characteristics: - Intangibles cannot directly be measured. - Intangibles are difficult to manage. - Limited ability to protect by property rights. - Intangibles investments are more risky. - Intangible assets are nonphysical and therefore inherently difficult to trade. - Intangibles are not evidence by financial transactions (as tangibles are).

Measurement of VBM Value of intangibles can be indirectly measured by: - input indicators (such as Research and Development, acquired technology or investments in information technology) - output indicators (such as the number of patents, the number or quality of citations, or the number of innovations brought forward).

Conclusion The fact that accounting systems and annual reports don’t have to reflect the correct status and current attributes of intangible assets leads to information asymmetry on intangible assets in corporations, which leads to: 1. Value Creation below the maximum possible; 2. Management for Value being suboptimal; and 3. Measurement of Value (Corporate Valuation) remaining extremely difficult.

Traditional Financial Approach Long Term Outlook VALUE