Value-based management as a tailor-made management practice? A literature review
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Value-based management as a tailor-made management practice? A literature review Kai Henning Blume1
Springer Science+Business Media New York 2015
Abstract Value-based management is largely discussed as fundamental tool to manage organizations successfully. However, it is often criticized for its alleged incentive to maximize short-term profits. Thus, it is the aim of this study to shed more light on the role of value-based management for organizational success and discuss which firms seemingly benefit from the adoption of value-based management systems. Since adoption rates vary among firms, the implementation and its effect on organizational performance may be a matter of systematic circumstances. In particular, the extent of agency conflicts and arrangements to alleviate those conflicts designate where value-based management potentially serves as an effective monitoring instrument. Additionally, a more reactive strategic orientation and low growth opportunities imply a need for more efficient capital management as one lever to increase organizational performance. These conditions are accompanied by managerial characteristics and industry pressure that determine the use of valuebased management systems, and do not undermine its incentive for efficient capital management. Hence, value-based management seems to be tailor-made for these specific circumstances. Keywords Value-based management Corporate governance Contingency theory Shareholder value Literature review JEL Classification
G30 M21 M41
& Kai Henning Blume [email protected] 1
Management Accounting Research Group, School of Business and Economics, Philipps-Universita¨t Marburg, Am Plan, 1, 35037 Marburg, Germany
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K. H. Blume
1 Introduction Value-based management is a management practice that has been discussed for more than two decades, helping executives to manage organizations successfully (e.g. Stewart 1991; Knight 1998; Ittner and Larcker 2001; Malmi and Ika¨heimo 2003; Martin et al. 2009). In particular, value-based management includes the investor’s risk (cost of capital) in management control and decision-making and thus, facilitates the efficient use of capital and increases shareholder wealth (Wallace 1997; Malmi and Ika¨heimo 2003). Furthermore, using the firm’s cost of capital as a benchmark in decision-making and for performance evaluation, shareholder’s costs to monitor the management’s activities decrease (Lovata and Costigan 2002; Ryan and Trahan 2007). In this view Elgharbawy and Abdel-Kader (2013) propose the role of value-based management contributing to organizational success by ‘‘keep[ing] the balance between conformance [with corporate governance standards] and [organizational] performance […]’’ (Elgharbawy and AbdelKader 2013, p. 100). Moreover, the authors suggest that value-based management influences both corporate governance and corporate entrepreneurship as important drivers of organizational performance.1 However, the primary focus of value-based management, to maximize shareholder value (e.g. Knight 1998;
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