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History of Value Based Management
Value-based management traces its theoretical and academic roots in general to modern discounted cash flow (DCF) methods of valuation, and in particular to the Miller-Modigliani approach to enterprise valuation (1961). VBM applied as an actual management practice came later, and can be broadly divided into three phases:
- Phase One – 1980s: Companies begin to include cost of capital in their performance measurement systems through new value-based metrics that measure economic profit. Alfred Rappaport publishes Creating Shareholder Value in 1986. The shareholder revolution empowers “corporate raiders,” who ensure that company management focuses on value generation, contributing to the economic boom of the late 1980s.
- Phase Two – 1990s: Consultants Joel Stern and Bennett Stewart popularize EVA (Economic Value Added) as a leading value-based performance metric, and focus on EVA-based incentive compensation plans, which become a widespread specific application of VBM theory. Academic research confirms the efficacy of VBM, and its growing use parallels the economic boom of the 1990s.
- Phase Three – 2000s: Hermann J. Stern publishes his theory of market-oriented Competitive Value Management and develops the corresponding method of financial benchmarking with Peer Universes of capital market peers. Hermann Stern and Keating Coffey create the new metric Operating Alpha (Ω α) as a measure of operating outperformance. They propose their theory of Indexing Operating Performance to measure operating performance independent of external economic variables, and also to standardize performance measurements as percentile ranks for comparison. Their finance research firm Obermatt develops new VBM applications for indexed operating performance, and expands the use of Operating Alpha beyond corporations to include private equity and investors.
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