LECCIÓN 2.

VALUE CREATION, STAKEHOLDERS

AND CORPORATE GOVERNANCE
STRATEGIC MANAGEMENT I

Prof. Antonio Montero Navarro

Facultad de Ciencias de la Comunicación

2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE

Agenda

1. The performance of the firm: value creation

1I. Stakeholders

1II. Corporate governance

2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
The performance
Subtítulo
estratégicas
of 1the firm: value creation

Ronda and Guerras (2012), “the dynamics of the firm’s relation with its environment for which
the necessary actions are taken to achieve its goals and/or to increase its
performance by means of the rational use of resources”
Which is the goal of the firm? How can we increase its performance?

CLASSICAL ANSWER: SHAREHOLDERS

The goal of a firm must be the goal of its owners, the shareholders
CURRENT ANSWER: The stakeholders of the firm must be detected, evaluated and
STAKEHOLDERS analysed
Along with the
The executives, due to the separation between the ownership and
shareholders, there are
the control of the firm, may have their own goals, apart from value
different stakeholders creation. Corporate governance
related with the firm
who have their own The firm operates in a society, and has to pay attention to its
goals requirements. CSR
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
The performance
Subtítulo
of 1the firm: value creation

In order to measure the performance of the firm, different P&L ACCOUNT, SUMMED
measures have been traditionally used: UP

- Absolute value measures, that can be seen in bold Sales

letters, reflect the results of the firm after paying for the - Cost of RRMM
different factors and agents: suppliers, workers, creditors __________________
and society. Gross margin
- Relative measures, ratios which measure the
profitability of the resources used: - Salaries
__________________
EBITDA
- D/A
__________________
EBIT
How to achieve economic profitability (ROA): increasing the - Interests
margin, increasing the turnover or both. So, we can sell a lot of __________________
units with a low margin, or a few units with a big margin EBT
- Taxes
__________________
Net benefit
Esta foto de Autor desconocido está bajo licencia CC BY-SA
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
The performance
Subtítulo
of 1the firm: value creation

P&L ACCOUNT, SUMMED

UP

Sales
- Cost of RRMM
__________________
Economic Degree of Cost of the Taxes effect Gross margin
profitability indebtment debt
- Salaries
Leveraging effect __________________
A high level of indebtment
EBITDA
multiplies profits or loses
- D/A
__________________
A firm can generate profitability through margin or EBIT
turnover. And can multiply that profitability getting - Interests
indebted at a low cost or with a low tax bill __________________
EBT
- Taxes
__________________
Net benefit
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
The performance
Subtítulo
of 1the firm: value creation

P&L ACCOUNT, SUMMED

UP

Example of favourable leveraging Sales

A firm with a TA of 1 million € achieves a ROA of a 10%. Calculate
- Cost of RRMM
its ROE if it is not indebted, if the liabilities are a 50% of TA and if __________________
liabilities are a 99% of TA, considering that the interest rate of the Gross margin
debt is a 5% and there are no taxes - Salaries
__________________
DENT=0%;
EBITDA
SF=100% - D/A
__________________
DEBT=50%;
SF=50%
EBIT
- Interests
DEBT=99%; __________________
SF=1% EBT
If the interest rate is lower than ROA, the more indebted the firm is,
- Taxes
the higher the profitability for the shareholders __________________
Net benefit
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
The performance
Subtítulo
of 1the firm: value creation

P&L ACCOUNT, SUMMED

UP

Example of unfavourable leveraging Sales

A firm with a TA of 1 million € achieves a ROA of a 10%. Calculate
- Cost of RRMM
its ROE if it is not indebted, if the liabilities are a 50% of TA and if __________________
liabilities are a 99% of TA, considering that the interest rate of the Gross margin
debt is a 5% and there are no taxes - Salaries
__________________
DENT=0%;
EBITDA
SF=100% - D/A
__________________
DEBT=50%;
SF=50%
EBIT
- Interests
DEBT=99%; __________________
SF=1% EBT
If the interest rate is higher than ROA, the more indebted the firm is,
- Taxes
the lower the profitability for the shareholders __________________
Net benefit
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
The performance
Subtítulo
of 1the firm: value creation

As an investor, a shareholder want to maximize the market value of his/her investment. There are two
different approaches to value
It is the NPV of the future cash flows of the firm, discounted at an interest rate
THEORETICAL VALUE
that is calculated adding a risk Premium to the interest rate of the zero risk
financial asset (German bond)
MARKET VALUE The value of the firm in the capital market

>1 The market value of shareholder funds is

higher than the original value of shareholder
funds. The firm is creating value

=1 The market value of shareholder funds is

equal than the original value of shareholder
funds. The firm is neither creating nor
destroying value

<1 The market value of shareholder funds is

lower than the original value of shareholder
funds. The firm is destroying value
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
The performance
Subtítulo
of 1the firm: value creation

Value creation depends on the relationship between the financial profitability generated
and the profitability expectations of the shareholders

Being g the reinvestment, a percentage of the ROE

We can draw two conclusions

PROFITABILITY ACHIEVED Vs REQUIRED MVSF/SF

If the firm achieves a ROE higher than required, b=0,1
the firm will be creating value. In the opposite
situation, it will be destroying value
b=0

THE ROLE OF REINVESTMENT

If a firm is creating value, reinvesting the profits

will multiply that value creation. If it is destroying
value, this value destruction will also be boosted
be reinvestment
ROE/Ke
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
The performance
Subtítulo
of 1the firm: value creation

Milestones to be compared with the ROE of a firm

0 The firm achieves some profitability

Zero risk asset The investors are somehow paid for the risk they are assuming

Ke Value creation for the shareholder

Average profitability of
The firm is more profitable than its competitors
the industry
Average profitability of
The firm is more profitable than the capital market
the capital market

This analysis also draws some managerial and financial conclusions

REINVESTMENT AND DIVIDENDS BUSINESSES TO BET,

DECISIONS BUSINESSES TO LEAVE
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Stakeholders
Subtítulo
estratégicas
1

Freeman (1984), in his paper ‘A stakeholder approach’ defines

stakeholders as “any individual or group that may affect or be affected
by the goals of the firm”

INDIVIDUALS OR THEY HAVE THEIR OWN THEY CAN AFFECT OR BE

GROUPS GOALS AFFECTED BY THE FIRM

Stakeholders cannot be ignored, as they hold an important potential influence on the firm

STEP 1 STEP 2 STEP 3

IDENTIFYING EVALUATING ANALYSING
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Stakeholders
Subtítulo
estratégicas
1

KINDS OF STAKEHOLDERS

INTERNAL EXTERNAL
POSITION IN RELATION WITH THE
Inside the firm Outside the firm
FIRM

PRIMARY SECONDARY
They have a CONTRACTUAL RELATIONSHIP They don’t have a
contract with the contract with the
firm firm
GOVERNMENT
SHAREHOLDERS
CLIENTS

MANAGERS
SUPPLIERS
WORKERS
BANKS
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Stakeholders
Subtítulo
estratégicas
1

STRATEGIC VALUE OF STAKEHOLDERS

POWER: LEGITIMACY:
CAPACITY OF MAKING SOCIAL ACCEPTANCE
ITS GOALS PREVAIL OF THE GOAL

POSITIONS

CRITICAL
URGENCY: EXPECTING
NEED TO ACHIEVE
THE GOAL LATENT
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Stakeholders
Subtítulo
estratégicas
1

STAKEHOLDER ANALYSIS

There is no possible solution for a strategic conflict without satisfying the

CRITICAL
STAKEHOLDERS
critical stakeholders, as they can make their goal prevail (power), they have
the need to do it (urgency) and they are socially accepted (legitimacy)

OTHER Not critical stakeholders look for what they lack. They can do it through
STAKEHOLDERS alliances

The relevance of each stakeholder conditions the attention paid to them,

MANAGEMENT
the effort made to handle them and its relevance

CONDITIONS AND A need for some balance, protecting value creation, putting a limit to the
LIMITS power of each stakeholder…

The management of the political pressures is one of the main leadership roles
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Corporate Subtítulo
governance
estratégicas
1

In big firms, the majority of the shares are in the hands of small shareholders, which cannot
control the top managers, professionals hired to manage the firm
The separation between ownership and control has some consequences

OWNERS MANAGERS

The try to maximize the market value of They could try to maximize their own wealth,
shareholder funds power, status…

They don’t have all the information They have all the information

Growing is not necessarily a goal Growing can be a personal goal

They reduce their risk diversifying their They reduce their risk diversifying the portfolio
investment portfolio of the firm

The goals of the managers have to be matched with the goals of the
shareholders
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Corporate Subtítulo
governance
estratégicas
1

FIRMS MARKET

CAPITALS MARKET
EXTERNAL
EXECUTIVES MARKET

G&S MARKET
CONTROL
MECHANISMS DIRECT SUPERVISION

INTERNAL

INCENTIVE SCHEMES
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Corporate Subtítulo
governance
estratégicas
1
HOW IT WORKS LIMITATIONS
If the managers are not maximizing • Markets have to be efficient
the market value, the firm becomes a • Tender offers can be agreed
FIRMS MARKET • The executives will defend their ground
good target for a tender offer
(takeover bid) by an external investor • There can be manoeuvres in the Board

• Markets have to be efficient

Under a wrong management, the • Institutional investors (mutual funds,
CAPITALS Price of the shares can drop, and
MARKET retirement plans) have to be important
paying the debt could be at the stake • Only Works for listed companies

• Managers are not always well know because

There is a market for the executives, of their value creation, but because their
EXECUTIVES where they are evaluated on a value
MARKET fame
creation basis • Golden parachutes can block

• The majority of markets are not under

Under perfect competition, if the perfect competition, so there are some slacks
G&S MARKET management of a firm is not efficient, • Satisfaction, not maximization
the firm will be expelled off the market • Firms keep some exceeding resources
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Corporate Subtítulo
governance
estratégicas
1
Reward or incentive systems pay the managers for accomplishing the goals of the
owners (shareholders), that is, maximizing value
Managers are rewarded for creating value through bonuses. Problem…
DIRECT VARIABLE PAY can you know who exactly created value?

OWNERSHIP PROGRAMS The top managers can be given shares, stock options…

Managers are promoted on a value contribution basis. Nevertheless,

PROFESSIONA CAREER
top executives cannot be easily promoted

OTHER RETRIBUTION PROGRAMS Payments, cars, benefits, medical programs…

Direct supervision intends to watch over the behaviour of the top managers

THE MANAGERS
BIG AND EXTERNAL
BOARD OF THEMSELVES
INSTITUTIONAL CONSULTANTS AND
DIRECTORS CONTROL EACH
SHAREHOLDERS AUDIT COMPANIES
OTHER
2. VALUE CREATION, STAKEHOLDERS AND CORPORATE GOVERNANCE
1. CAMPUS DE MÓSTOLES
Las decisiones
Corporate Subtítulo
governance
estratégicas
1

OWNERSHIP
EXTERNAL Representing big shareholders

INDEPENDENT
BOARD OF
DIRECTORS Intended to represent small shareholders

INTERNAL
Executives of the firm

The top managers will tend to control the Board of Directors, limiting its supervising role. In
order to avoid it, most of the countries have developed Governance Codes, trying to
reinforce the trust of the shareholders.
The concern about Corporate Governance has generalised through European countries: UK
(Cadbury, Greenbury and Hampel Committees), France (Vienot reports), Spain (Olivencia,
Aldama and Conthe committees and codes), Netherlands (Peters report)…