1. Thoughts for Today, Tomorrow, and The Future
Welcome to Class 20
A Stakeholder Perspective
Thoughts for Today, Tomorrow, and The Future
Chapter 9

2. Performance Perception: A Stakeholder Perspective
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3. Corporate Performance: Satisfaction is variable
Assessments may vary by stakeholder group
Stakeholder groups include:
Long-term Investors
Short-term Investors
Short-term Creditors
Long-term Creditors
Top Management Teams (TMTs)
Employee Unions
Take-over Firms

4. Common methods for Assessment Performance
Accounting
Method
Adjusted
“Accounting”
Market
Assessment
Methods

5. Assessment based on unadjusted accounting data
Accounting Method
Assessment based on unadjusted accounting data
Net Worth
Revenues
Profits (Gross & Net)
Asset Utilization & Operating Leverage
Debt Management & Financial Leverage
Equity Returns
Cash Flows
Liquidity
Problem:
Values are frequently either exaggerated or substantially understated due to estimation techniques.
(depreciation, depletion, amortization, bad debt allowances, loan loss estimates, etc.)

6. Adjusted “Accounting” Method
Assessment based on “adjusted” accountings data
Estimates current value of assets
Reduces balance sheet values by eliminating Goodwill and other non-marketable intangibles
Recalculates financial ratios originally based on the Accounting Method
Problem:
Values used are based on the estimators assessment which can be significantly incorrect.

7. Market Method Price/Earnings ratios (TPE, FPE, PEG) Stock Beta
Assessment based on Market values
Price/Earnings ratios (TPE, FPE, PEG)
Stock Beta
Market Capitalization
Problem:
Values used are based on UNQUANTIFIABLE (therefore unverifiable) CORPORATE RESOURCES (such as Knowledge Capital).
Decisions are frequently tied to movements within the market and these, according to the former Federal Reserve Chairman , Alan Greenspan often demonstrate irrational behavior.
Scholarly studies have discovered that values are frequently manipulated by TMTs, offering short-term benefits to some investors and costly crashes for long-term investors.
(see your text for more specific details)

8. Risk of illusionary values Think about it and YOU be the judge.
Market Method
Risk of illusionary values
Book Value to Market Value Ratios for corporations has been decreasing steadily
Does this represent illusionary value of UNQUANTIFIABLE (unverifiable) corporate resources?
Does this encourage TMTs to manipulate market values?
Think about it and YOU be the judge.
This may or may not be a problem, however let the investor beware.

9. Risk of illusionary values increasing?
Market Method
Risk of illusionary values increasing?
As the ratio of book to market gets smaller the actual collateral behind the investment also gets smaller. The investment risk gets greater
Tesla 9.1
Amazon 4.9

10. 5. Top Management Teams (TMT) 6. Employee Unions 7. Take-Over firms
The 7 Stakeholder Groups can be associated with specific Assessment Methods
1. Long-term Investors
2. Short-term Investors
3. Short-term Creditors
4. Long-term Creditors
5. Top Management Teams (TMT)
6. Employee Unions
7. Take-Over firms
See pages 242 – 245 in your textbook. It explains the performance points of interest to each stakeholder group.

11. Summary
A firm’s level of performance is largely a matter of perspective
Perspectives differ among the 7 Stakeholder groups
The three primary methods are Accounting, Adjusted “Accounting”, and Market.
Each of the three methods has both benefits and drawbacks
It is important to understand the strengths and weaknesses of each in order to appropriately judge performance within the context of a particular stakeholder group
The Market Method has become increasingly popular
The Market Method has many benefits but also some significant dangers for misuse and abuse.
The primary objective here is to raise relevant questions, identify potential negative consequences of data sources, and sharpen awareness skills.