Value based management metrics - Shareholder value analysis ...

Learning Outcomes

By completing this article, you will understand the principles of value based management (VBM) and how shareholder value analysis drivers guide decision-making to improve shareholder wealth. You will be able to identify key value drivers, discuss main VBM measures such as EVA and NPV, and apply this knowledge in analysing performance and recommending improvements, as required by the ACCA Advanced Performance Management exam.

ACCA Advanced Performance Management (APM) Syllabus

For ACCA Advanced Performance Management (APM), you need to understand value based management and its application to performance measurement. Focus your revision on:

• The concept of value based management (VBM) and its role in guiding management decision-making
• Identification and appraisal of shareholder value analysis (SVA) drivers
• How VBM techniques such as EVA, NPV and shareholder value analysis support long-term wealth creation
• Linking strategic objectives and operational actions to value drivers
• Assessing the strengths and limitations of VBM metrics
• Advising on appropriate value drivers and VBM metrics to improve shareholder value

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is a primary objective of value based management (VBM)?
   1. Maximising revenue
   2. Ensuring legal compliance
   3. Maximising shareholder value
   4. Increasing market share

2. Name three examples of typical SVA (shareholder value analysis) drivers that management can directly influence.

3. True or false? Value based management metrics only include financial indicators such as profit and ignore non-financial measures.

4. Briefly explain why an exclusive focus on short-term profit might conflict with a VBM approach.

5. What is the fundamental difference between EVA and traditional ROI?

Introduction

Value based management (VBM) provides a structured approach to aligning company strategy, operations, and management incentives with the ultimate goal of maximising shareholder wealth. Central to VBM is the identification of shareholder value analysis (SVA) drivers—specific factors that directly impact the value created for shareholders.

Understanding how these drivers relate to key performance metrics, such as Economic Value Added (EVA), Net Present Value (NPV), and Shareholder Value Analysis, is essential for ACCA APM candidates. These tools move performance measurement beyond short-term profit and instead ensure alignment with long-term wealth creation.

Key Term: value based management (VBM)
A management approach that aligns a company’s strategy, goals, and performance measures with the objective of maximising long-term shareholder value.

Key Term: shareholder value analysis (SVA) driver
A factor or activity that directly influences the creation or loss of value for a company’s shareholders, typically measured over the long term.

VALUE BASED MANAGEMENT PRINCIPLES

Overview of VBM

VBM requires every part of an organisation to focus decision-making on activities that contribute to shareholder value. This means evaluating projects, processes, and strategic priorities not just by their earnings, but by their effect on the long-term value of the business.

Key Term: value driver
A measurable factor, such as sales growth or cost efficiency, that management can influence and that directly impacts the present value of future cash flows, supporting shareholder value creation.

Why Use VBM Metrics?

Traditional profit measures do not always reflect whether an organisation is genuinely increasing shareholder value. VBM metrics overcome this limitation by:

• Focusing on discounted future cash flows, not just current profit
• Taking the cost of capital into account
• Emphasising sustainable value creation, not just accounting outcomes

Common VBM Metrics

The most frequently used value based performance metrics include:

• Economic Value Added (EVA) – Measures value created above the firm’s cost of capital.
• Net Present Value (NPV) – Assesses whether specific projects add value by considering the present value of future cash inflows less outflows.
• Shareholder Value Analysis (SVA) – Calculates the value of the entire business based on projected future cash flows, applying discounted cash flow principles.

Linking VBM to Strategic and Operational Actions

Effective VBM translates strategic objectives into actionable targets at all organisational levels. Value drivers must be identified at each stage, ensuring that divisional, operational, and even individual employee targets align with the creation of shareholder value.

Key Term: economic value added (EVA)
A measure of financial performance representing the net profit after deducting a charge for the opportunity cost of the capital employed.

SHAREHOLDER VALUE ANALYSIS DRIVERS

What Are SVA Drivers?

SVA drivers are the key activities or factors that management can target to increase the company's value. They are typically grouped into broad categories:

• Revenue growth: Increasing sales through volume, pricing, or market expansion
• Operating margins: Improving efficiency or reducing costs to raise profit margins
• Asset efficiency: Making better use of assets to generate higher returns (e.g., reducing working capital, optimising fixed asset utilisation)
• Tax efficiency: Managing the tax burden to improve after-tax returns
• Investment decisions: Focusing capital on projects offering returns above the cost of capital
• Capital structure: Managing debt and equity mix to optimise the overall cost of capital

Examples of Common SVA Drivers

• Sales volume growth
• Average selling price per unit
• Cost of goods sold as a percentage of revenue
• Inventory turnover
• Debtor collection days
• Research & development effectiveness (e.g., proportion of sales from new products)
• Customer retention rates

Selecting and Managing Value Drivers

Not all drivers are equally influential in every business. To effectively manage for value, you must:

• Identify the most significant drivers in your business model/industry
• Set targets and KPIs relating to those drivers
• Monitor their impact on overall value creation

Key Term: net present value (NPV)
The present value of future cash inflows less outflows, discounted at a suitable rate, showing whether a project adds value to the firm.

USING VALUE DRIVERS IN PERFORMANCE MANAGEMENT

A value based management system works only when value drivers are embedded in planning, performance measurement, and management rewards:

• Strategic plans should target improvements in the most impactful drivers
• KPIs at every level should be linked directly to performance against these drivers
• Incentive schemes should reward achievement of value driver targets, not only short-term profits

Worked Example 1.1

A manufacturing company sets a five-year target to grow revenue by 8% per year, improve operating margin from 12% to 14%, and reduce inventory days from 50 to 35. Management decides to evaluate divisional leaders' performance using EVA, alongside KPIs for each driver.

Question: How does this approach help align day-to-day actions with shareholder value maximisation?

Answer:
By linking strategic targets and operational KPIs to critical value drivers, managers focus on sustainable growth, efficiency, and asset utilisation—all of which have a direct and measurable impact on the company's NPV and EVA. This approach encourages decisions and behaviour that build long-term shareholder value, rather than maximising short-term reported profits.

Worked Example 1.2

Hexo Retail Co’s SVA drivers include: customer retention, cost per sale, and capital expenditure payback. The board considers investing in a costly digital platform that will boost sales and automate inventory management.

Question: What should management consider in deciding whether to proceed with the investment using VBM principles?

Answer:
Management should evaluate the project’s incremental cash flows, discount them at the firm’s cost of capital, and assess the impact on key value drivers. They must confirm the expected improvements (e.g., increased average order size, lower inventory days, higher customer retention) translate into positive NPV and improve EVA, rather than relying on projected accounting profits alone.

BENEFITS AND LIMITATIONS OF VBM METRICS

Main Benefits

• Focuses decisions on long-term value, not just reported profits
• Aligns management incentives with shareholders’ interests
• Encourages discipline in capital investment choices
• Helps prevent short-termism and dysfunctional behaviour

Limitations

• Requires accurate identification and monitoring of value drivers
• Some value drivers may be difficult to measure reliably
• Complex calculations (e.g., EVA adjustments) may reduce transparency
• Can be resource-intensive to implement and communicate

Exam Warning

In APM scenarios, always evaluate whether chosen KPIs and value drivers are truly linked to shareholder value. Be prepared to criticise performance schemes that focus only on accounting profits or isolated operational metrics without referring to the impact on NPV or EVA.

Summary

Value based management ensures that all management actions, process improvements, and investment decisions are evaluated according to their contribution to long-term shareholder wealth. Identifying and managing key shareholder value drivers allows organisations to align short-term actions with the overarching aim of sustainable value creation, as measured by robust financial metrics like EVA and NPV.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the purpose of value based management (VBM)
• Identify key shareholder value analysis (SVA) drivers relevant to business performance
• Describe how value drivers affect long-term shareholder value
• Apply VBM metrics such as EVA and NPV to examine value creation
• Analyse the alignment of strategic, tactical, and operational performance with shareholder value
• Critically assess the strengths and limitations of VBM metrics in real-world applications

Key Terms and Concepts

• value based management (VBM)
• shareholder value analysis (SVA) driver
• value driver
• economic value added (EVA)
• net present value (NPV)