9
Thinking about
critical issues
Summary
ž Because wealth creation stems from the efficient use of scarce
resources in satisfying customer needs, the corporate goal
of maximizing shareholder value requires that management
skillfully weigh the economic trade-offs among the competing
interests of stakeholders.
ž Irrespective of the industries in which firms operate, it
is increasingly recognized that knowledge is essential for
superior performance. Key top-management skills now include
(a) providing a vision, (b) focusing on total-system efficiency,
(c) promoting an innovative environment, (d) guiding and
fostering adaptability and (e) creating a continuous-learning
organization.
ž A corporate vision is a core purpose that inspires and guides
persons within the firm to want to do those things that ulti-
mately make the firm financially successful. When share-
holder value is viewed and communicated in terms of CFROIs
and sustainable growth, the connection between non-financial
drivers and corporate performance is more apparent.
ž Managing by ‘accounting value drivers’ carries a high risk of
misdirection. Accounting data should be used to improve the
efficiency of a total system centered on business processes tied
to customer satisfaction and employee satisfaction. The causal
direction is from sound processes to successful results.
ž Firms have failed largely because management did not recog-
nize that the foundation assumptions of the business no
longer fit reality. Firms’ structures and processes need to
actively promote feedback so that innovation in response to an
Thinking about critical issues 215
ever-emerging future occurs continuously. The stock market
is a valuable source of feedback concerning managements’
assumptions about the future, and the model by which the
stock market is observed, interpreted, and communicated is
critical to the ‘messages’ received.
ž Internal accounting systems should serve as a tool to assist
creative thinkingthinking that addresses important elemen-
tary issues as to how work is done.
ž Firms successfully configured as learning organizations contin-
uously create and leverage knowledge that results in more
efficient business processes for designing, making, selling, and
servicing products.
ž A valuation perspective such as that provided by the CFROI
model is essential to developing more useful accounting treat-
ments for soft assets, such as intellectual capital.
ž Firms’ internal performance measurement involves complex
issues and needs to be addressed as a learning process.
The total system diagram introduced in Chapter 1 is reproduced as
Figure 9.1. The shaded area of this figure highlights critical elements
inside the firm, which serves to organize the major topics of this
CFROI
Valuation
Model
FIRM
GAAP
FINANCIAL SSTATEMENTS
MANAGERIAL SSKILL
Vision
System Efficiency
Innovative Environment
Adaptability
Learning Organization
Integration of Control Variables
and Accounting Data
Valuation/Resource Allocation
BUSINESS UNIT MEASUREMENTS
Tangible Assets
Intangibles
ACCOUNTING RRESULTS
Business Processes
Employee Satisfaction
Customer Satisfaction
CONTROL VARIABLES
Feedback
Stock
Price
Feedback
Feedback
Figure 9.1 Analyzing the firm as a total system.
216 CFROI Valuation: a total system approach to valuing the firm
chapter and provides a context for pertinent excerpts from the
writings of some leading researchers. The chapter reveals how key
CFROI valuation concepts are compatible with work being done by
others on unfolding critical issues.
Shareholders, stakeholders,
and government policy
Valuation models and public policy
Public misperceptions about firm performance and the market’s valu-
ation of it has enormous trouble-making potential in the national
attitude about the role of government as overseer of business. While
public enthusiasm for government direction of business activity
is much diminished from its heights, it is probably safe to say
there remains, worldwide, a large segment of the people that highly
doubts the business goal of maximizing shareholder value is aligned
with the interests of society at large. One expression of this doubt is
the notion that businesses should be managed not in the interest
of shareholders alone, but of stakeholders, including employees,
customers, suppliers, and the community at large. Some writers
support government policies intended to encourage business to
be more socially responsible, which includes taking better care of
their employees generally and especially by providing greater job
security.
This notion of stakeholder interests has its roots in a myopic
analysis that runs along these lines: In pursuing the interests of
shareholders, top management is continually, quarter-to-quarter,
under pressure to improve the bottom line and to make the numbers
expected by Wall Street analysts. Reducing costs becomes the top
priority, and downsizing becomes the way of life in Corporate America
and is making its way to other countries. Operations are consolidated;
major plants are shut down; large numbers of long-service employees
are forced to take early retirement or are fired; suppliers local to the
shuttered plants lose major customers and they too are forced to
reduce their workforces; economic multipliers magnify the economic
contraction and its related losses of wealth across the community. At
the consolidated operations, remaining employees become overbur-
dened and overstressed by the additional work; product quality and
customer service worsens. Yet, company’s profits increase substan-
tially, as does the price of its stock. Shareholders and top executives
are handsomely enriched at the expense of everyone else.

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