Value dynamics of management

A Value Based Management is concerned with the use of accounting information within organisations so as to facilitate decision making and management control function. It constitutes the analysis of financial and allied operating data in order to help management carry out planning, control and managerial functions in an efficient manner.
Amongst other things, involves the use of techniques, such as, costing, budgetary control, marginal costing, preparation of management accounts and financial ratios. Unlike financial information which is made publicly available, Value Based Management information is used within an organisation to aid management and is meant to be confidential.
VALUE BASED MANAGEMENT Value creation is the ultimate goal in managerial and financial decision-making. Knowing, where the value is created and where it is lost, are keys for maintaining high standards of corporate governance and strategic decision making. In order to create value, management must have a deep understanding of the performance variables that drive the value of the business.
These are called the Key Value Drivers. A value driver is a variable that significantly affects the value of the organisation. In order to be useful, however, value drivers need to be organised so that the management can identify which has the greatest impact on value and assign responsibility for their performance to individuals who can help the organisation meet targets.
CORPORATE OBJECTIVES AND VALUE DRIVERS - EXHIBIT-1: below highlights the connection between corporate objectives and include value drivers, such as, intangibles, operating, investment and financial:
The objective of management is to provide consistent and positive value. Shareholder value - Exhibit 2 - is created by improving cash flow from operations and minimising the cost of capital by making optimal capital structural decisions. The cash flow from operations is determined by the value drivers and is affected by operational and investment decisions taken by the management:
SHAREHOLDER VALUE CREATION STRATEGIES:
Shareholder value creation strategies highlight the implications of the framework as they relate to the financial and operational value drivers. It also shows the value drivers and various underlying strategies that positively influence these drivers.
Successful and competitive organisations generally have a Value Based Management -VBM - Structure. The linkage between strategy and value creation can be summarised by two simple principles of value creation. The first principle is that management must create value for shareholders. The second principle is that all other stakeholders should also be satisfied in a way that contributes to shareholder value.
The company's ability to continue to attract capital by providing incremental value to shareholders is exactly what will allow it to continue to provide attractive products to its customers, attractive employment to its staff, and opportunities for its suppliers.
These attributes create competitive advantages, which is a prerequisite for creating value. The success of Value Based Management hinges on management's ability to balance the sometimes conflicting notions of value between the three principal partners: customers, employees, and shareholders.
For the management to be efficient and useful in making strategic decisions, the challenge lies in transforming accounting needs in a manner that leads to value creation for all the stake holders - Exhibit 3. Value Streams.
In these increasingly challenging times, change is needed in the methods, approach and function of management accounting. Traditional management accounting emphasises on issues such as control of the organisation through planning and tracking of costs, utilisation of resources, inventory valuation and cost absorption, optimising efficiency through comparison of actual costs to predetermined standards and so forth.
The focus of management accounting in forward thinking enterprises is moving from cost to a chain of value creation which analyses the traditional reports in a way that highlights value drivers and their level of efficiency.
Efficient management accounting in a 21st century successful organisation is capable of clearly identifying the obstacles in the flow of works and processes. Value is created when the work flows unencumbered through the company's value streams and processes. When the flow stops, value is no longer created and wastage begins.
The system must show these obstacles and their impact on time, cost, and quality in a timely manner. It should provide measurement, analysis, classification, and insight into the problems of the process. It is important to identify the root cause of these obstacles and how they impact the enterprises strategic and tactical goals.
The management accounting creates value by engendering relentless continuous improvement. The reports and measurements within the system must actively support the local empowerment of continuous improvement.
This is done by making available the right information at the right time, and in a format that is accessible and useful to the user. Much of this information is gathered and provided locally.
This information is used to initiate improvement projects designed to achieve strategic performance goals. Information is also analysed so that the root causes and their sources can be identified and eliminated.
The company's continuous improvement - in whatever shape or form it is done - should see management accounting as the principle source for project initiation, analysis, prioritisation, and measurement of success.
Management accounting must not be seen as a watchdog to keep track of the business changes, but an inherent part of every aspect of the continuous improvement process acting as an active feedback loop.
THE CHANGE AGENTS: Management Accountants are the "pulse" that drive performance through value-addition activities impacting all strategic areas. They have, for years, been concerned with the financial drivers like profit margins, capacity utilisation and financing structures.
This specific knowledge plus the broadening of management accounting responsibilities that has taken place during the last decade has enhanced their role and level of involvement in all the key drivers of value creation in an organisation as the effective change agents.
While the degree of involvement will vary, among others, several focal points seem particularly pertinent, such as:
Assessing the potential of VBM characteristics which can successfully implement a VBM approach that leads to a positive environment including a senior management commitment to maximising value, a desire to align performance objectives and value, and an interest in creating stronger links between pay and performance;
Communicating the fundamentals of value creation including educating what VBM is, the strategies that lead to value creation, the key drivers of value, the measures of value, and how an individual's work can support a VBM initiative;
Measuring shareholder value on making value-based calculations for measuring shareholders value;
Linking value measures to financial and operational drivers inculcate value creation skills in operations personnel so that everyone in the organisation is pointing in the same value-enhancing direction;
Assisting in designing performance measurement systems including designing, explaining and maintaining the performance measurement system to provide the right value creating signals to management. This is a critical area as traditional performance measurement systems may reward dysfunctional behaviour - behaviour that leads to value destruction.
Assisting in setting value-based compensation plans, providing valuable advice on the development and implications (what-if scenarios) of various value-based compensation strategies;
Assisting in evaluating value-creating strategies and structures - measure outcomes - as also to use expertise in order to evaluating initiatives through which projects lead to a positive NPV.
It is in this context that the Value Dynamics of Management is expected to play its role, more and more, day by day ie Value Based Management. The thrust of Value Dynamics of Management is on vital business insight rather than being transaction - heavy inspection and reconciliation engines.
The role of the Management Accountants in modern organisation thus need to transform from a mere collectors and presenters of financial data to team-members and proactive change agents for VALUE CREATION as the core business social responsibility - and nothing else!
ATLAS VALUE DYNAMICS:
Atlas Group was founded in 1962 with the establishment of Shirazi Investments Limited with a capital of half a million rupees and three men doing business in trading shares and real estate. Initially, the Group believed in "small is beautiful", which meant that the Group may remain small but must be well managed.
The Group achieved this objective quite admirably! Two decades later, when the next generation of managers joined, they decided that the Group should be one of the best, if not the best, in all aspects of management.
The Group is striving to accomplish this objective with an added emphasis is now on economy of scale.
The Group has been practising good corporate governance since inception. Rules and regulations on Corporate Governance were enacted only a couple of years ago. The Board of Directors of the Group is headed by a non-executive Chairman. The Group President operates as the Group Chief Executive Officer. Board of Directors of each Group company comprises of no more than two members representing the sponsors and equity holders.
The rest of the Board is from the public at large. The non-executive directors play an integral role in strategic planning, internal audit. Moreover they head the various committees including the remuneration committee. The Human Resource Committee of the Group is headed by the Group (non executive) Chairman. The key areas of emphasis are building and retaining intellectual capital, developing a management information system and encouraging in-depth communication.
The Group has implemented Value Based Management and believes in the systems approach. It has established centralised systems to enhance planning and forecasting with implementation of the plans, decentralised.
Each Group company is headed by a professional CEO. His role is defined as a Performer in terms of market share, profitability, cash flow and company image. He is expected to be an Organisation Builder based on a sound structure, strategy and systems on the one hand and staff skills, style and shared values on the other.
As a Strategist, the CEO is responsible for the right product, the right market, selling what the customers want and correct positioning in the market. Strong emphasis is laid on information technology and computerisation. Daily statement of Group performance is prepared in addition to the monthly and quarterly balance sheet and the profit & loss accounts.
"Cash is King", delegation but not abdication and strong structure and systems are the guiding principles for the Group. The Group strongly believes in maintaining a cordial relationship with the government, foreign and local entrepreneurs, its employees and society at large - Systems Approach - Exhibit 4:
Human resource development has been the hallmark of the Group. Recruitment is based on intellect, integrity and character. Emphasis is on education and training including Exec. MBAs and Exec. Diplomas. The key executives are given international exposure through business schools including Harvard, Wharton, Stanford, IMD and INSEAD.
Apart from its focus on the right recruitment of the right people, right education and training, right career planning and succession of the right people in the Group, emphasis is also on the right return to the shareholders, and sharing the gains with the society at large.
The Atlas Group deals in engineering, financial services, trading, power products and oil lubricants. It consists of seven public limited companies of which six are quoted on the stock exchanges in Pakistan.
The Group employs over 7,000 men and has an equity of over Rs 20 billion, assets over Rs 50 billion and current year sales forecast of over Rs 50 billion - with one of the highest returns on equity of over 30% and earning per share of over Rs 15. The Group's criterion of performance also includes how much tax it pays: last year the Group paid taxes of about Rs 12 billion, which is about 2% of the government revenue:

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To Achieve        Value Drivers        Strategic Requirements

                  higher revenues      patent barriers to entry, niche markets innovative products, etc

                  and growth

An increase in    lower costs and      scale economies, captive access to raw materials, higher efficiencies

cash flow         income taxes         in processes (production, distribution services) and labor utilisation

from operations                        effective tax planing, etc

                  reduction in         efficient asset acquisition and maintenance, spin-offs, higher utilisation

                  capital expenditure  rates of fixed assets, efficient working capital management, divestiture

                                       of negative-value-creating assets, etc

                  reduced business     consistent and superior operating performance compared to

                  risk                 competitors, long-term contracts, project financing, etc

A reduction       optimise capital     achieving and maintaining a capital structure that minimises the

in capital        structure            overall costs, optimises tax benefits, etc

charge

                  reduced cost of      reducing surprises (volatility of earnings), designing niche

                  debt                 instruments, etc

                  reduced cost of      consistent value creation

                  equity

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EXHIBIT 4

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SYSTEMS APPROACH

CEO'S ROLE

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PERFORMER                         ORG. BUILDER              STRATEGIST

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Market Share                          7Ss                   Right Product

Profitability                       Criteria                Right Market

Cash                                                        Selling what customers want

Improvement                                                 Positioning correct

Staff

Co. Image

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COMPUTERISATION                                            BASIS OF CORRECT POSITIONING

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Daily Statements                        High Cost

Monthly Group B/S and P/L Account       Differentials

One of the best, if not best in every

respect.                                Low Cost

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                                                            Niche          Broad Market

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GUIDING PRINCIPLES

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HARMONEY                                GUIDING PRINCIPLES

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                                        "Cash is King"

With Government                         Delegation but not ABDICATION

In foreign                              Following 7Ss: 3 Hard - Structure, Systems &

In business                             Strategy; and 4 soft: Staff, Skill, style and

                                        Shared Values.

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