Value-based management catches on
[QQ]Growth in the use of value-based management (VBM) has doubled in European business since 1994, according to a survey by KPMG Consulting.[QQ] Two-thirds of companies in the UK and continental Europe now accept that the use of discounted cashflow models or measures of economic profit is part of good financial management.[QQ] More than 80% of companies in Ireland and Germany claimed to use VBM, while UK companies ranked fifth, at 67%, behind Switzerland and Austria.[QQ] What exactly VBM means, however, has been subject to misunderstanding, although KPMG Consulting’s Dan Springer reported that some 80% of businesses provided a definition of VBM that matched the one that the consultants used.[QQ] Springer’s survey also found that those companies which claim they are using VBM were also more likely to be the ones which claim to keep in operation only businesses that generate returns that exceed the cost of capital – this is a cornerstone of VBM.[QQ] There is also a growing awareness of the investment community’s use of VBM tools to value businesses, although VBM-users were more likely to feel that their companies were being undervalued than those that do not use it. Profit growth, earnings per share and p/e ratios are still seen as key measures used by investors to value businesses.[QQ] But only 36% of the sample used “shareholder value added” as the basis for rewarding executives: profits and earnings are the key performance measures in more than three-quarters of the companies surveyed. Sales growth was used by a third as a performance measure for executive remuneration.[QQ] See the executive remuneration feature, page 30.