Sustainable Value Creation with Effective VBM

According to an OECD study, Swiss companies have shown themselves to be very resilient by international standards in recent years, which have been characterized by the COVID-19 pandemic and geopolitical upheavals.¹ Nevertheless, the ongoing macroeconomic and geopolitical turbulence poses major challenges for many companies. Various studies and surveys show that increasing profitability and thus the financial value creation of companies is one of the current key issues for boards of directors and decision-makers.

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Key Takeaways

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Increasing company value is the overriding financial objective
Value-based Management is an indispensable instrument of financial corporate management for increasing profitability
Good operational performance increases financial and strategic flexibility and creates security for all stakeholders
Value-based incentive systems as part of management remuneration support the alignment of employees with value-based principles
Application-oriented training promotes a value-based mindset within the company and is crucial to the successful establishment of a value-based management approach

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What do we mean by "financial value creation"?

A company creates financial value if its enterprise value can be sustainably increased by at least the amount of the owners' risk-adjusted return expectations. A key prerequisite for a sustainable increase in company value is that a return can be achieved on the invested capital of a company that is higher than the risk-adjusted cost of capital. A company's equity investors benefit from this increase in enterprise value in the form of dividends or capital gains on the shares (total shareholder return).

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Successful companies are characterized by the fact that they create sustainable financial value. From the perspective of financial corporate management, improving financial value creation is therefore the overriding objective. In addition to increasing value for the benefit of equity providers, sustainable positive financial value creation has other key advantages for a company:

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Financial flexibility: an increase in operating performance increases the company's debt capacity and therefore makes it easier to raise capital, which increases the company's financial flexibility.
Strategic flexibility: A good operating performance increases strategic flexibility for future investments, acquisitions and divestments. This creates room for maneuver for management to ensure sustainable financial value creation.
Security: Sustainable financial value creation creates security for all of the company's stakeholders.
Company sale and succession planning: A high enterprise value, which is based on a sustainably good operating performance, is an essential basis for an appropriate pricing and a successful transaction.

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"Aligning the strategy with financial value creation is essential for increasing profitability."

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How does Value-based Management work in a company?

The introduction of a value-based management approach establishes a management system that places financial value creation at the center of action. Successful implementation includes the following elements in particular:

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Strategy: The strategy must be aligned with specified towards financial value creation and defined by means of value-based objectives within the company.
Performance measurement: Performance measurement must be based on key performance indicators that take into account both the company's specific business model and financial value creation. In particular, the return on invested capital must be established at company, division and product level with an appropriate allocation of capital.
Planning approach: Financial value creation requires a proactive approach to the increasing complexity and dynamics of the business. Against this background, rigid and inefficient planning and budgeting processes need to be reconsidered and replaced with dynamic and simplified processes.
Management remuneration: The definition of value-based incentive systems as part of management remuneration ensures that the behavior and decisions of employees are aligned with the principles of financial value creation.
Training: In order to anchor a value-based mindset in a company in the long term, it must be ensured that internal and external stakeholders understand the value-based management approach and act accordingly. Application-oriented training is a necessity and a key factor in the successful establishment of a value-based management approach.