Value-based Management

General Information:

The lecture „Value-based Management“ is a Master course. Please check with the help of your student counselling office if and how you can integrate the subject into your curriculum. The course can no longer be attended by Bachelor students. Only Bachelor students already enrolled in earlier semesters are able to take the exam if they failed on their first try.

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Important information due to the current Corona-situation and the resulting restrictions regarding in person lectures and exercises: The lectures and exercises will be substituted by videos from the previous year until further notice. Additionally, we are going to offer digital question time for both the lecture and the exercise for the originally planned time slots on Wednesday. Further information will be posted on Moodle at the beginning of the semester.

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Lecturer: Prof. Dr. Gunther Friedl
Tutor: Matthias Regier
Language: English
Scope: 4 SWS / 6 ECTS (Lecture with integrated tutorial)
Exam:TBA. Please note, that you have to register for the exam. We will announce the rooms for the exam after the registration deadline.
Registration: There is no registration required to participate in this course. (But registration for the exam is required to participate in the exam.)

Dates: The lecture takes place every Wednesday, 9:45-11:45, in room N1189.
Lecture:***Please look at the abovementioned information concerning the Corona-situation. Until further notice, there won't be any in-person meetings.***
The tutorial takes place every Wednesday, 13:15-14:45, in room 0540.
Tutorial:***Please look at the abovementioned information concerning the Corona-situation. Until further notice, there won't be any in-person meetings.***

Course Description:

Departing from discussing the conflicting concepts of maximizing shareholder and stakeholder value this course covers the different aspects of implementing value-based management in a company. The focus of the course lies on the concept of residual income as corporate and business unit performance measure. The course discusses the link to value creation of residual income and its possible advantages and disadvantages as performance measure for corporate performance as well as for the performance of responsibility centers deeper in a company’s organizational hierarchy. The use of financial and non-financial value drivers to complement the implementation of a company’s performance measurement system is also taken into consideration. Thereby the students are also introduced into the ratio analysis of a company’s financial statements to get the financial value drivers used in internal and external performance measurement. As well known version of residual income in practice the concept of Economic Value Added (EVA) is presented in detail. Several case studies are used to make the students get familiar with EVA calculations including the most relevant accounting adjustments proposed in practice and the problems and proposed solutions of calculating the cost of capital. The ability of residual income to provide managers with incentives to make present value maximizing decisions is further discussed on a strongly theoretical basis following the scientific concept of goal congruence. Within the framework of management compensation the course describes and analyzes the different and sometimes conflicting goals when designing a manager’s compensation package: alignment, wealth leverage, retention and minimizing stakeholder’s cost of compensation. The course considers diverse means of compensation to achieve different objectives, like stock options and bonus plans, and analyzes bonus plan design including different payout rules and bonus banks. Few remarks on the process of implementing value-based management in a company and on some of its pitfalls as well as one or two guest lectures about real world examples of value-based management in companies complete the lecture.

Structure of the course:

1.   Value Maximization and Corporate Objectives
2.   Measuring Income: Financial Statements
3.   Measuring Value Creation: Value-Based Performance Measures
4.   Management Compensation: Objectives and Alternatives
5.   Calculating the Cost of Capital
6.   Accounting Adjustments: Overview
7.   Accounting Adjustments: Goal Congruent Performance Measures
8.   Valuing and Managing Real Options
9.   Identifying the Drivers of Value Creation

Basic Literature:

Young, S. David and O‘Byrne, Stephen F.: EVA and Value-Based Management: A Practical Guide to Implementation, New York et al. 2001.

Friedl, Gunther and Deuschinger, Lena (2008): A Note on Economic Value Added (EVA)

Course Material:

The course material (tutorials, lecture notes) will be available on moodle.