Do South African managers focus on the creation of shareholder value?

Fasol, Ronald; Fi e , Colin A icle Do Sou h A ican manage s ocus on he c ea ion o sha eholde alue? Sou h A ican Jou nal o Business Managemen P o ided in Coope a ion wi h: Uni e si y o S ellenbosch Business School (USB), Bell ille, Sou h A ica Sugges ed Ci a ion: Fasol, Ronald; Fi e , Colin (1995) : Do Sou h A ican manage s ocus on he c ea ion o sha eholde alue?, Sou h A ican Jou nal o Business Managemen , ISSN 2078-5976, A ican Online Scien i ic In o ma ion Sys ems (AOSIS), Cape Town, Vol. 26, Iss. 2, pp. 72-79, h ps://doi.o g/10.4102/sajbm. 26i2.826 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/218141 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen (insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en, gel en abweichend on diesen Nu zungsbedingungen die in de do genann en Lizenz gewäh en Nu zungs ech e. Te ms o use: Documen s in EconS o may be sa ed and copied o you pe sonal and schola ly pu poses. You a e no o copy documen s o public o comme cial pu poses, o exhibi he documen s publicly, o make hem publicly a ailable on he in e ne , o o dis ibu e o o he wise use he documen s in public. I he documen s ha e been made a ailable unde an Open Con en Licence (especially C ea i e Commons Licences), you may exe cise u he usage igh s as speci ied in he indica ed licence. h ps://c ea i ecommons.o g/licenses/by/4.0/ n S.-A .Tydsk .Bed y sleiding 1995 26(2) Do Sou h A ican manage s ocus on he c ea ion o sha eholde alue? Ronald Fasol & Colin Fi e * G adua e School o Business Adminis a ion, Uni e si y o he Wi wa e s and, P.O. Box 98, Wi s, 2050 Republic o Sou h A ica Recei ed Janua y 1995 Sel -adminis e ed ques ionnai es we e sen o execu i e le el manage s o andomly chosen Johannesbu g S ock Exchange (JSE) lis ed companies. Responden s we e es ed o hei unde s anding and implemen a ion o sha eholde alue p ac ices. The majo i y o esponden s we e a a senio managemen le el. I was ound ha sha eholde~ alue managemen is s ill ega ded as a inancial managemen ool and no unde s ood o be a amewo k o he m eg a 1on o inancial and s a egic planning using he economic model o he i m. The majo i y o esponden s alloca e esou ces on a p ojec by p ojec basis and use he op-down app oach in he se ing o inancial a ge s esul ing in a concen a ion o alue a ound a ew business uni s in he company's po olio. S a egic plans a e no gene ally e alua ed acco ding o sha eholde alue po en ial. A sho coming is he use o acc ual accoun ing measu es in inancial planning and o he se ing o pe o mance a ge s. A limi ed numbe o esponden s had ull inancial and ope a ional au onomy in hei business uni s and pe o mance a ge s we e mos ly sho e m (less han h ee yea s) in na u e. V aelys e is aan bes uu slui op ui oe ende lak an maa skappye wa op die Johannesbu gse E ek ebeu s geno ee is, ges uu . Seleksie be op onwillekeu ige wyse plaasge ind. Responden e is i hul beg ip en implemen e ing an p ak yke aangaande aandeelhoue waa de ge oe s. Die mee de heid an die esponden e was senio bes uu slui. Daa is be ind da die bes uu an aandeelhoue waa de s eeds as 'n inansiele bes uu selemen beskou wo d, en nie as aamwe k i die in eg asie an mansiele en s a egiese beplanning wa die maa skappy as ekonomiese model geb uik nie. Die mee de heid an die eponden e wys hulpb onne op 'n p ojek- o -p ojek basis oe me 'n bo-na-onde benade ing en opsig e an inansiele doelwi o mule ing. Di be o ge olg da waa de ondom 'n paa sake-eenhede gesen ee wo d. S a egiese planne wo d nie no maalweg op g ond an die po ensiaal an aandeelhoue waa de gee aluee nie. 'n Teko koming is die geb uik an adisioneel- ekeningkundige maa s awwe by beplanning en by die bepaling an p es asiedoelwi e. 'n Bepe k e aan al esponden e was inansieel en ope asioneel ou onoom in hul sake-eenhede en p es asiedoelwi e was mees al ko e myn an aa d (minde as d ie jaa ). •To whom all co espondence should be add essed. In oduc ion Alongside he de elopmen s in s a egic planning, a numbe o de elopmen s we e aking place in he in es men managemen a ea. Sha eholde alue is adi ionally meas- u ed using he accoun ing model o alua ion. This model se s sha e p ices by capi alizing a company's ea nings pe sha e (EPS) a an app op ia e PIE mul iple. PIE mul iples howe e , adjus o changes in he quali y o a company's ea nings mak- ing i necessa y o adop a mo e eliable measu e o alua ion (S ewa , 1991: 22). Sha eholde alue managemen is a philosophy o manage- men , he p incipal objec i e o which is o gene a e e u ns o sha eholde s which exceed he company's cos o capi al, he eby maximizing long e m economic alue. I had i s beginnings in de elopmen s o e he pas 40 yea s in s a egy consul ing, co po a e inance and in es men managemen . Acco ding o McTagga , ' he de elopmen s in s a egy consul ing and inance we e ul ima ely combined o c ea e an in eg a ed amewo k by which la ge companies could mo e e - ec i ely manage hei businesses' (l 990a: 19). S a egic planning came in o i s own in he la e 1960s when managemen aced an inc easingly complex business en i- onmen . Two impo an echniques we e in oduced, he expe ience cu e and he g ow h sha e ma ix de eloped by he Bos on Consul ing G oup. Acco ding o James, ' he success ul use o hese echniques b ed a le el o con idence o he poin whe e op managemen e- quen ly abdica ed esponsibili y in selec ing a s a egy. Thus, he s a egis , o iginally an ad iso , began o domina e decisions ela ed o he physical p oduc ion and sale o goods and se ices' ( 1984: 57). A c isis de eloped in he 1980s as many o he s a egic planning concep s used wi h success in he 1970s we e ound o be no longe eliable and, in many cases, esul ed in s a e- gic ailu es. Fac o s con ibu ing o such ailu es we e he na ow ocus o business s a egies, he inadequacy and mis- applica ion o s a egic concep s, implemen a ion di icul ies and blind ai h in s a egies (James, 1984: 57-60). The ailu e o unde s and how sha e p ices a e se makes i di icul o execu i es o each sensible decisions ega ding business s a egies, acquisi ions and di es i u es, inancial s uc u e, di idend policy and bonus plans (S ewa , I 991: 21). In pa icula EPS, s ill commonly ega ded by manage- men as he p incipal ya ds ick by which he s ock ma ke p ices sha es, is no mally no a eliable indica o o alue, because he e ec s o accoun ing con en ion may help o enginee ea nings (Copeland, Kolle & Mu in, 1990: 82). Fo example, expenses ha should be deduc ed o sa e axes may be de e ed o boos epo ed ea nings and unusual w i e- o s could be aken in one yea o a oid a bad in es men decision om a ec ing epo ed ea nings o e a pe iod o ime. S udies which show ha accoun ing ea nings a e no well co ela ed wi h sha e p ices, ha he manipula ion o accoun - ing con en ion o con i e ea nings does no imp o e sha e p ices, and ha he ma ke looks a he Jong- e m cash low impac o managemen 's decisions, no he sho - e m ea n- ings impac , p o ide e idence o suppo he iew ha he ma ke looks a he long- e m economic alue ha is c ea ed S.A .J .Bus.Manage.1995 26(2) by a company and no he epo ed accoun ing ea nings (Copeland e al .• 1990: 83). Ul ima ely, sha eholde alue can be managed by unde - s anding ha sha e p ices a e de e mined by he expec ed cash o be gene a ed o e he li e o a business and he iski- ness o hese cash eceip s (Copeland e al .• 1990: 93; and S ewa , 1991: 4). A alue is assigned o a company in he capi al ma ke s by discoun ing he expec ed u u e cash lows o he company a an app op ia e discoun a e which e lec s he agg ega e isk pa icula o hose cash lows. The alue o he company can be managed by op imizing he cash low alue o he indi idual business uni s making up he com- pany. A business uni 's cash low is in u n maximized by managing i s asse s and imp o ing i s economic p o i abili y o e ime. This depends on he cha ac e is ics associa ed wi h i s p oduc ma ke s and is a unc ion o s a egy, indus y s uc u e and compe i i e posi ion. The link be ween he eco- nomic p o i abili y o a business uni 's p oduc ma ke s, i s cash lows and he cash low alue o he g oup is he key o he managemen o sha eholde alue. The impac ha managing o inc eased sha eholde alue is ha ing on cu en hinking in co po a e inance ci cles is demons a ed by a ple ho a o a icles appea ing in business pe iodicals such as Fo une magazine. Fo example, in he a icle ea u ing leade s o he mos admi ed co po a ions (Fo une, 1990), i was epo ed ha a Coca-Cola ' he mos no ewo hy change unde Chai man Robe o C. Goizue a has been a shi in ocus om boos ing sales o maximising sha e- holde e u ns'. The maximiza ion o sha eholde e u ns was again p omi- nen ly ea u ed in Fo une ( 1993a) whe e he concep o Eco- nomic Value Added (EVA),1 used o calcula e he alue a company gene a es o e and abo e i s cos o capi al, is dis- cussed. Fu he mo e, i is sugges ed ha EVA will become a compe i i e ad an age o companies using i and majo Uni ed S a es co po a ions such as Coca-Cola, AT&T, Quake Oa s, B iggs & S a on and CSX ha ha e adop ed he con- cep , ha e shown subs an ial inc eases in ma ke alue since he adop ion o EVA. The anking o Ame ica's bes weal h c ea o s (Fo une, 1993b) in e ms o Ma ke Value Added (MVA), a measu e closely ela ed o EVA, highligh s he de iciencies o o he adi ional pe o mance measu es such as u no e , p o i s, e u n on equi y and ma ke capi aliza ion. Resea ch conduc ed by S ewa (1992: 23) showed ha ma ke alue added by companies (o e and abo e hei o ig- inal capi al) co ela es bes wi h EVA. T adi ional measu es o co po a e pe o mance such as Re u n on Equi y, EPS g ow h and di idend g ow h a ed e y much wo se. Fou a eas in managing o sha eholde alue can be iden i- ied, which, when applied o a company, can esul in be e managemen o sha eholde alue (McTagga , 1989: 3). The i s wo ela e speci ically o s a egy in a di e si ied com- pany, namely co po a e (o company-wide) s a egy and busi- ness uni (o compe i i e) s a egy (Po e . 1988: 35). The hi d and ou h conce n s a egies ela ing o o ganiza ional s uc u e and managemen p ocesses, espec i ely. Albe s & Mc Tagga ( 1984: 138) sugges ha co po a e s a egy is conce ned wi h h ee ques ions, namely wha busi- nesses he company should be in; which businesses should be 73 di es ed om he cu en po olio; and how much capi al o alloca e o he po olio o businesses o e ime? The adi ional app oach o capi al alloca ion is based on in eg a ing he company's in es men decisions and balancing he company's business uni po olio. The balancing o he company's business uni po olio means ha co po a e le el planne s s i e o achie e a balance be ween uni s ha gene - a e cash and he as g owing uni s ha consume i . The alue-based app oach o capi al alloca ion, on he o he hand, consis s o choosing he highes alue s a egy om al e na i e s a egy op ions wi hou he need o a balanced po olio, and he eby decen alizing capi al spending deci- sions o each business uni . A he le el o he s a egic business uni , he e a e wo ele- men s o he de elopmen o s a egy: de e mining he ma ke segmen s in which he businesses should pa icipa e and de e mining how bes o compe e in each o hese segmen s. The business uni 's pa icipa ion is de e mined by he p o i a- bili y o he pa icula ma ke segmen and he business uni 's compe i i e posi ion. By de eloping al e na i e ope a ing s a egies o a ma ke segmen , i becomes possible o choose om se e al iable s a egies. The p o i abili y o a company's p oduc s and he ma ke s hey se e, play an impo an ole in iden i ying alue d i e s, which a e he sou ces o sus ainable compe i i e ad an age. The iden i ica ion o alue d i e s is he mos impo an ele- men in he s a egy de elopmen because i ocusses man- agemen 's a en ion on he cha ac e is ics o he business ha ha e he mos le e age, bo h in e ms o compe i i e ad an- age and alue c ea ion. Mos alue d i e s in a s a egic busi- ness uni a e de i ed om i s co e asse s and skills. Examples o co e asse s include a b and anchise, a ou a- ble e ail loca ions, access o aw ma e ials, a pa en ed p od- uc echnology and a low cos co e body. Examples o co e skills include a highe olume, mo e disciplined app oach o pu chasing, a lowe cos manu ac u ing p ocess, a as e dis- ibu ion sys em, a mo e highly ained and mo i a ed sales o ce and a be e managed, mo e p oduc i e R&D eam. A business uni which is alue based is cha ac e ized by i e ac o s. The i s conce ns he s a egy de elopmen p ocess which is gea ed owa ds he c ea ion o alue. The second is he linking o a business uni 's s a egic posi ion o i s p ospec i e inancial pe o mance. The hi d in ol es he use o alue d i e s o de elop al e na i e s a egies. The ou h equi es he use o ela i e alue o choose om di e - en s a egies and he las conce ns he linking o he chosen s a egy wi h a pe o mance managemen plan. In a alue-based company. con ol by he co po a e cen e is exe cised h ough he c ea ion o an in e nal capi al ma ke . The objec i e o he ma ke is o alloca e esou ces o busi- nesses in a way ha p o ides s a egy d i en con ol and ewa d mechanisms. As a esul o ollowing an in eg a ed managemen p ocess, he s a egic plan ep esen s bo h a unding commi men and a pe o mance con ac be ween he co po a e sha eholde and he managemen o businesses. The s a egic plan is also used o se pe o mance a ge s based on alue d i e s and makes he con ol p ocess a p oduc o s a egy a he han he s a egy being he p oduc o he con ol p ocess. The 74 pe o mance a ge s in u n a e used o design he incen i e compensa ion p og am o each business. Once he alue-based managemen p ocesses ha e been implemen ed, he o ganiza ional s uc u e is adjus ed o e lec he na u al alue cen es wi hin he po olio o busi- nesses. A alue cen e is he smalles uni wi hin a company o which an independen s a egy can be de eloped and al- ued. Indi idual oles and esponsibili ies a e also changed o manage sha eholde alue wi hin he company. Li le published ma e ial exis s on he cu en use o sha e- holde alue managemen . Coope s and Lyb and, Deloi e ( 1991) commissioned a su ey which assessed he cu en use by managemen o sha eholde alue p inciples in he Uni ed Kingdom. I was ound ha op managemen mos ly used sha eholde alue measu es o majo business decisions. On he o he hand, he majo inancial ins i u ions, which in es ed in he companies, expec ed op managemen o make mo e equen use o sha eholde alue measu es o ou ine planning and managemen and o epo ing o in es o s. Al hough wo hi ds o he companies in he sample s udied used he concep o sha eholde alue, only one in six made ull use o i o planning and epo ing pu poses. Howe e , i appea ed ha sha eholde alue measu es would become mo e impo an o managemen pu poses in he u u e, espe- cially o he la ge companies. Companies o en claim o ope a e o he bene i o hei sha eholde s, bu hey a ely demons a e how his will be achie ed. This obse a ion, coupled wi h he absence o esea ch on he subjec as i pe ains o he Sou h A ican co - po a e en i onmen , leads o he ques ion: do Sou h A ican manage s ocus on he c ea ion o sha eholde alue? Answe s o he ollowing ques ions we e sough : l. Do senio manage s o Sou h A ican companies unde - s and he p inciples by which sha eholde alue can be managed? 2. Wha aspec s o sha eholde alue managemen a e com- monly p ac ised? Me hodology A ques ionnai e comp ising h ee pa s was cons uc ed. Pa A was designed o collec de ails o he in e iewee and he company. I gene a ed se en nominal esponses. Pa B was designed o measu e he esponden 's unde s anding and app ecia ion o sha eholde alue p inciples. This unde - s anding was es ed quan i a i ely using ma ix- ype ques ions. Responden s we e asked o ank on a Like scale hei ag eemen /disag eemen wi h ele en s a emen s e lec - ing sha eholde alue p inciples. The ele en o dinal esponses we e escaled using Co espondence Analysis in o de o con e he o dinal in o in e al da a so as o ensu e he app op ia e weigh ing o he Like scale esponses. The las pa (C) o he ques ionnai e was designed o meas- u e he ex en o which sha eholde alue managemen p inci- ples we e p ac iced. The eliabili y o he answe s o he ques ions in his sec ion depended on he unde s anding he esponden s had o he cons uc s used o desc ibe sha e- holde alue p ac ices. The ques ions we e designed o p o- ide bo h quan i a i e as well as quali a i e da a and consis ed o a combina ion o wo answe (yes/no) and con- ingency o ma s. Al oge he 33 nominal esponses we e S.-A .Tydsk .Bed y sleiding 1995 26(2) gene a ed. Whe e ele an , he con ingency o ma p o ided addi ional in o ma ion o esponden s' yes o no answe s. This quali a i e aspec was use ul in assessing whe he esponden s unde s ood he concep s associa ed wi h alue- based managemen . An ou line o he ques ionnai e may be ound in he appendix. Ques ionnai es we e sen o a sys ema ic andom sample o 222 companies which was d awn om a sample ame o 657 JSE lis ed companies. The sec o s omi ed om he sampling we e he cu ailed gold ope a ions, he de elopmen capi al and en u e capi al ma ke s. The a e age esponse a e was 23%. The esponse a e pe JSE sec o is shown in Table l. A Chi-squa e goodness o i es demons a ed ha he dis ibu- ion o companies by he JSE sec o in he sample was no dissimila o he JSE popula ion as a whole. Al hough he ques ionnai es we e a ge ed a Chie Execu- i e O ice s, p o ision was made o o he di ec o s and/o senio managemen o espond. Al oge he 72% o he esponden s we e senio execu i es, 28% we e a he le el o execu i e chai man and 26% we e managing di ec o s. Table 2 shows he numbe s o esponden s g ouped by company u no e . Resul s Unde s anding o sha eholde alue p inciples On escaling he Like scales o he ele en a i ude ques ions using co espondence analysis he alues ob ained we e l. l.61, 3.45, 4.7 and 5, espec i ely, hus showing a ma ked de- g ee o skewness in he da a. Sha ehold e sus s akeholde in e es The majo i y (88%) o esponden s belie ed ha i was managemen 's p ima y esponsibili y o look a e he in e es s o he sha eholde s. A he same ime, mos e- sponden s (54%) el ha he in e es o o he s akeholde s would be comp omised i he ocus o a company was solely o ien ed owa ds he in e es o he sha eholde s. Table 1 Ques ionnai e esponse a e JSE sec o Mining Financial Indus ial To al To al JSE No. sen No. ecei ed Response a e 102 31 5 154 51 II 401 140 34 657 222 50 Table 2 Company size dis ibu- ion o sample Tu no e Numbe o esponden s Less han R50 m 8 R50 oR149m 6 RISO o R499 m 5 RSOO o Rl500 m 12 Me e han Rl500 m 17 To al 48 16% 22% 24% 23% s.A .J.Bus.Manage.1995 26(2) Sha eholde alue d i en compensa ion Mos esponden s (76%) we e o he opinion ha manage- men 's compensa ion should be ied o sha eholde e u ns. De e minan s o sha eholde alue Al oge he 88% o esponden s ag eed ha sha eholde alue is des oyed i he e u n on capi al is lowe han he company's cos o capi al. This demons a ed hei unde - s anding o he ac o mos c ucial in he c ea ion o sha e- holde alue. Applicabili y o sha eholde alue managemen Th ee qua e s o he esponden s we e o he opinion ha equi y concen a ion did no p e en Sou h A ican companies om applying sha eholde alue managemen and a like pe cen age we e o he opinion ha sha eholde alue managemen was no ad. Common pe cep ions in managing sha eholde alue Well o e hal he esponden s (62%) belie ed ha EPS was a eliable measu e o co po a e pe o mance. When espond- en s we e asked whe he he ma ke places emphasis on sho - e m de elopmen s in aluing sha es and whe he sha eholde alue managemen is a inancial managemen ool, 54% and 58%, espec i ely, ag eed. I is impo an o no e, howe e , ha o he la e wo s a emen s an app eciable numbe o esponden s ga e neu al esponses (28% and 32%, espec i ely). This would indica e u he ag eemen (in iew o he skewed Like scales) and hence a poo unde s anding o he abo e-men ioned issues in ela ion o alue-based p inciples. Managing company alue Al oge he 78% o esponden s belie ed ha he alue o a business is de e mined by he p esen alue o u u e p ojec ed cash lows discoun ed a a isk-adjus ed cos o capi al. A lowe numbe o esponden s (46%) we e o he opinion ha a company's sha e p ice could be managed. P ac ice o sha eholde alue managemen The p ac ice o sha eholde alue managemen was e alua ed by he esponses o ques ions conce ning he company's need o de elop alue c ea ing s a egies a he co po a e and he business uni le els, and he implemen a ion o hese s a egies a he o ganisa ional le el using he app op ia e o ganisa ional s uc u es and managemen p ocesses. Co po a e s a egy Value c ea ion ends o be concen a ed: The alloca ion o esou ces a he p ojec le el and he se ing o co po a e inancial a ge s using he op-down me hod leads o he phenomenon o c oss-subsidiza ion. In his p ocess, cash is di e ed om alue-c ea ing businesses o alue des oying businesses and alue ends up being concen a ed in a ew businesses wi hin he company's po olio (McTagga , l990b: 2). E idence sugges ing ha alue may be concen a ed in a ew business uni s is ob ained when analysing he esponses o he co po a e s a egy ques ions. I was epo ed by 54% o 75 esponden s ha hey alloca e capi al on a p ojec by p ojec basis, and ha he alloca ion o esou ces is based on IRR (38% o esponden s) and payback (20% o esponden s), which is ypical o a p ojec by p ojec app oach. I was ound ha 30% o esponden s use op-down goals in he se ing o co po a e inancial a ge s. Al hough he majo - i y o esponden s (52%) indica ed ha he se ing o a ge s happens h ough a p ocess s a ing a he business uni le el, only 18% o esponden s con i med he wo-way in e ac ion be ween he co po a e cen e and he business uni . I was also consis en wi h he abo e-men ioned esponses ha only 38% o esponden s epo ed 50% o mo e o he company's capi- al ea ning a e u n abo e he company's cos o capi al. Fu - he mo e he majo i y o esponden s (62%) epo ed an in e io pe o mance ela i e o hei JSE sec o . Measu es o co po a e inancial pe o mance: Much o he concen a ion e ec a he co po a e le el may ha e occu ed because o companies' con inued eliance on accoun ing a he han economic model measu es. The measu emen o alue c ea ion wi h he w ong accoun ing-based ule s has been quo ed by Reimann (1987: 16) as one o he easons why so many companies ha e no de ec ed he des uc ion o sha eholde alue. Ea nings, ROI and EPS we e ound o be he p edominan measu es o co po a e inancial pe o mance amongs Sou h A ican companies (57% o he o al esponses). This may accoun , in pa , o he in e io pe o mance epo ed by some esponden s. O he accoun ing-based measu es like RONA and ROE we e men ioned in a u he 26% o esponses. The economic model measu e, Economic Value Added, only ea u ed in 15% o he esponses Capi al s uc u e: Many o he esponden s (62%) epo ed ha ing excess gea ing capaci y bu ew we e willing o ake on mo e deb in o de o dec ease he i m's cos o capi al. The main easons p o e ed we e he company's p e e ence o being cash lush, he lack o good in es men op- po uni ies, he e ec deb would ha e on inancial a ios and he pe cep ion ha addi ional deb does no lowe . bu would in ac inc ease, he cos o capi al. Co po a e acquisi ions: The majo i y o esponden s (54%) we e ound o ha e an acquisi ion p ocess conduci e o sha e- holde alue c ea ion. Only 26% o esponden s indica ed omi ing wo o mo e o he h ee p ocesses in ol ed in acquisi ions o ensu e he c ea ion o sha eholde alue, namely he quan i ica ion o he con ol p emium, he se ing o he plan o ecap u e he p emium and he nomina ion o a pe son o be esponsible o achie ing he s a egic and inancial a ge s p io o he acquisi ion aking place. Business s a egy Value ends o be e en mo e concen a ed a he business uni le el because i is di icul o iden i y he sou ces o alue wi hou alloca ing sha ed cos s and asse s. The adi ional app oach o s a egy o mula ion a he business uni le el has consis ed o ocussing on objec i es such as, amongs o he s, ma ke sha e. gaining a compe i i e ad an age and becoming a low cos p oduce (McTagga & Fa a o. 1990: 3). The 76 p incipal sho coming o he adi ional app oach o s a ~gy o mula ion was he lack o emphasis on alue c cauon, which could only be ec i ied by linking he s a egic and inancial planning in an in eg a ed manne . The alue-based app oach equi es he business uni o i s conside i s s a egic posi ion in e ms o ma ke s uc u e and compe i i e posi ion whe ea e he alue o he cu en s a - egy is e alua ed using discoun ed cash- low echniques. By knowing he alue o he cu en s a egy and he ela i e alue con ibu ion o he ma ke segmen s in which he busi- ness uni ope a es, i becomes possible o isola e alue d i - e s. An inc eased ocus on he alue d i e s in a business can subsequen ly lead o he de elopmen o al e na i e, highe alue business s a egies. The alue-based s a egies can u - he mo e be used as a basis o pe o mance managemen (McTagga & Fa a o, 1990: 5). In eg a ion o inancial and s a egic planning: Al oge he 84% o esponden s claimed o in eg a e he s a egic and inancial planning unc ions. On close inspec ion howe e , i was e ealed ha companies unde s ood such in eg a ion o mean he elemen a y ansla ion o he s a egic plan in o accoun ing-based numbe s ins ead o he p esen alue o u u e cash lows. In he majo i y o cases, esou ces we e alloca ed in line wi h he s a egic plan and he se ing o budge s was in line wi h he p e ious yea 's s a egic plan. Al hough his app oach is co ec , sha eholde alue can only be c ea ed i he s a egic plan leads o a posi i e ne p esen alue o he company. Such an e alua ion can only be made i he s a e- gic plan is quan i ied in economic alue e ms, no in accoun ing e ms. Knowledge o ma ke s uc u e and compe i i e posi ion: The majo i y o esponden s (54%) claimed knowledge o he p o i abili y o he ma ke s in which hey ope a ed and hei compe i i e posi ion in hese ma ke s. They had in o ma ion ela ing o hei compe i o 's ma ke posi ion and p o i abili y and e iewed om ime o ime hei pa icipa ion in hese ma ke s. Mos esponden s he e o e appea ed o ha e su icien knowledge o ie hei business uni s' s a egic posi ion o hei p ospec i e inancial po en ial in e ms o economic alue added. I is p oposed ha he eason why esponden s a e unable o ake his knowledge o i s logical conclusion is due o he use o accoun ing ins ead o economic alue in o - ma ion. This p oposi ion is consis en wi h he ac ha he e was no e idence ha companies knew he cu en alue o hei business uni s a egies. Value d i e s: Responden s we e gene ally un amilia wi h he e m alue d i e s as he sou ces o sus ainable com- pe i i e ad an age. Value-based pe o mance managemen plan: I was ound ha he s a egic plan was only used by 28% o esponden s as a basis o he se iug o long- e m ( h ee o i e yea ) pe o mance a ge s. In he sho e m, he majo i y o esponden s (82%) used he business uni 's s a egic plan as a S.-A .Tydslc .Bed y sleiding 1995 26(2) basis o pe o mance a ge s and 60% said ha emune a ion depended on hi ing he a ge s se in he business plan. This inding is only meaning ul in e ms o sha eholde alue c ea ion i he plan being implemen ed has a posi i e ne p esen alue. O ganisa ion s uc u e The indings o he su ey in e ms o o ganisa ion s uc u e indica ed a pa ial adhe ence o alue-based p inciples o managemen . The majo i y o esponden s epo ed ha hei business uni s we e s uc u ed along s a egically independen lines and ha hese business uni s had a ull inancial exp ession h ough sepa a e income s a emen s and balance shee s. Ob ious weaknesses in e ms o sha eholde alue, howe e , we e he limi ed pe cen age o esponden s (50%) ha had ull inancial and ope a ional au onomy in hei business uni s and he numbe (42%) epo ing he use o ee nego ia ion o se ans e p ices. These weaknesses a e ypical o companies ha ha e a s ong endency owa ds cen alized co po a e decision-making and hey sugges addi ional easons o he obse ed phenomenon o alue concen a ion a he co po a e le el. Managemen p ocesses Al oge he 38% o esponden s admi ed ha he p ac ice o alloca ing esou ces was pa o a sho - e m (less han h ee yea s) managemen con ac whe eby managemen unde ook o pe o m acco ding o he business plan, whe eas 22% indica ed ha he alloca ion o esou ces is pa o a Jong- enn managemen con ac . A u he 36% said ha no manage- men con ac exis ed in he p ocess o alloca ing esou ces. This inding is consis en wi h he p e ious inding ega ding he sho - e m na u e o commi men by managemen o he mee ing o pe o mance a ge s. Al hough he majo i y o esponden s (82%) epo ed ha esou ce alloca ion was based on he alue o be c ea ed o sha eholde s, i was p e iously obse ed ha s a egies we e no ansla ed in o alue-based pa ame e s such as cash low. One he e o e canno be su e ha esponden s alloca e capi al on he basis o s a egies ha ha e been e alua ed in e ms o sha eholde alue. I seems mo e likely ha he s a egies a e implemen ed wi h he in en ion o c ea ing sha eholde alue. a he han knowing he alue po en ial o he s a egy. Two hi ds o esponden s use accoun ing-based ya ds icks and only one hi d use cash low-based ule s o measu e managemen 's pe o mance. Al hough he majo i y o esponden s (66%) claim o link execu i e emune a ion wi h he c ea ion o sha eholde alue, i is unlikely ha in p ac ice his is ue o mos esponden s because o he use o accoun ing-based in o ma ion o measu e managemen 's pe - o mance. Conclusions The imp essi e esponse om op le els o managemen has gi en he indings o his esea ch added signi icance. The majo i y o esponden s we e a an execu i e managemen le el. Al hough ag eemen la gely exis s on managemen 's p i- ma y du y, which is o look a e he in e es o he sha e- S.A .J.Bus.Manage.1995 26(2) holde . i was also el ha he in e es s o o he s akeholde s would be comp omised i he sole ocus o managemen was based on sha eholde in e es . Knowledge o sha eholde alue was demons a ed by a majo i y suppo o sha eholde alue-d i en compensa ion and o he applicabili y o sha e- holde alue managemen . The inancial de e minan s o sha eholde alue we e also well unde s ood bu esponden s we e less com o able wi h he hough o being able o man- age company alue. Sho comings in he unde s anding o sha eholde alue p inciples we e e ealed o e issues conce ning EPS as a eli- able measu e o co po a e pe o mance, he pe cep ion by mos esponden s ha he ma ke places emphasis on sho - e m de elopmen s in aluing sha es and sha eholde alue managemen as a inancial managemen ool, a he han an in eg a ed inancial and s a egic planning ool. A he co po a e s a egy le el, i was ound ha he majo - i y o esponden s alloca ed esou ces on a p ojec by p ojec basis using IRR and payback, and used he op-down app oach in he se ing o inancial a ge s using accoun ing- based measu es such as ea nings, ROI and EPS. Bo h p ac- ices we e la gely esponsible o he concen a ion e ec o alue a ound a ew businesses in he company's po olio. The majo i y o esponden s shied away om he use o deb o lowe he company's cos o capi al, some o easons such as he e ec deb has on inancial a ios and he imp ession ha mo e deb inc eases he cos o capi al, and o he s, o easons o wan ing o be cash lush and he lack o good in es men oppo uni ies. Al hough he majo i y o esponden s claimed ha hei s a egic and inancial planning was in eg a ed a he business le el, he explana ions o he me hodology employed o accomplish he in eg a ion made i clea ha SBUs gene a e only one s a egic plan and do no choose om al e na i e plans based on hei ela i e sha eholde alue po en ial. SBUs a e u he mo e no in a posi ion o e alua e he s a e- gic plan in e ms o he alue i will c ea e o he sha eholde because o he use o acc ual accoun ing ins ead o economic alue measu es. I is suspec ed ha he alloca ion o esou ces a he busi- ness le el con inues o be misdi ec ed owa ds SBUs wi h weak s a egic posi ions esul ing in a simila deg ee o con- cen a ion o alue a ound a ew ma ke s wi hin he SBU con- ce ned. This e ec was p e iously no ed a he co po a e le el, whe e only 38% o esponden s epo ed ha 50% o mo e o hei company's capi al was ea ning a e u n g ea e han he cos o capi al. Clea ly, a majo s umbling block in he alue c ea ing p oc- ess a bo h co po a e and business s a egy le els emains he use o acc ual accoun ing me hods in he gene a ion o inan- cial plans. Accoun ing-based measu es a e ul ima ely mis- leading in e ms o sha eholde alue c ea ion (Reimann, 1987: 16). In e ms o he managemen p ocesses, when supe icially iewed, companies end o obse e alue-based p ac ices such as he linking o s a egic planning and budge ing, he alloca ion o esou ces based on he alue i will c ea e o he sha eholde , he unde aking by managemen o pe o m acco ding o he business plan, albei a sho - e m plan, and he p ac ice o linking execu i e emune a ion wi h he alue n ha is c ea ed o he sha eholde . The abo e-men ioned man- agemen p ocesses a e only e ec i e in e ms o sha eholde alue c ea ion once he ya ds ick. is based on economic alue pa ame e s. Un il companies lea n o exp ess hei s a egic plans in e ms o such measu es. he alloca ion o esou ces owa ds p o i able plans will emain a hi and miss a ai . Only hen can managemen 's pe o mance be measu ed and ewa ded in e ms o he alue c ea ed as pa o a longe e m managemen con ac . No e 1. EVA is he T adema k. o S em. S ewa & Co, New Yo k. Re e ences Albe s, W.W. & McTagga , J.M. 1984. 'Value based sua egic in- es imen planning', Jn e, ace, ~I. 14, No.I: 138-150. Coope s and Lyb and Deloi e 1991. Sluudolde alue llNllysis - s a egic p io ilies o las ing business success. London: Coope s and Lyb and Deloi e. Copeland, T., Kolle , T. & Mu in, J. 1990. 'Cash is King', The McKin.sey Qua e ly, Sp ing: 82-94. Finance Week. 1992. 'Finance Week/S em S ewa Pe o mance 200', Ma ch 19-25: 30-36. Fo une Magazine. 1990. 'Leade s o he mos admi ed', Janua y 29: 22-28. Fo une Magazine. 1993a. 'The eal key o c ea ing weal h', Sep- embe 20: 24-32. Fo une Magazine. 1993b. 'Ame ica's bes weal h c ea o s', Decem- be 27: 50-55. James, B.G. 1984. 'SMR Fo um: s a egic planning unde i e', Sloan Managemen Re iew, Summe : 57-61. Mc Tagga , J.M. 1989. 'The managemen o sha eholde alue, Pa 1: applica ion o co po a e s a egy', Commen a y. Ma akon Asso- cia es, Fall: 1-5. Mc Tagga , J.M. l 990a. 'The e olu ion o alue based manage- men ', Commen a y, Ma akon Associa es, Fall: 16-20. Mc Tagga , J.M. l 990b. 'Managing o c ea e alue - ou lessons lea ned', Commen a y, Ma akon Associa es, Fall: 1-15. McTagga , J.M. & Fa a o, K.R. 1990. 'The managemen o sha e- holde alue, Pa 11: applica ion o business s a egy', CO ll l l- a y, Ma akon Associa es, Sp ing: 1-12. Po e , M.E. 1988. 'F om compe i i e ad an age o co po a e s a - egy', The McKin.sey Qua e ly. Sp ing: 35-66. Reimann, B.C. 1987. Managing/o alue, a quide o able based s a egic managemen . Ohio: The Planning Fo um. S ewa , B.G. (Ill) 1991. The ques o able. New Yo k: Ha pe Business. S ewa , B.G. (Ill) 1992. As quo ed in Walbe , L.R., Capi al choices', Co po a e Finance, Oc obe / No embe : 22-45. Appendix Ques ionnai e Pa A: In e iewee and company de ails Al Name (op ional) A2Job li le A3 Company (op ional) A4 You managemen le el: Execu i e Managemen (CEO,COO,CFO,MD) O he Di ec o Senio Managemen O he : (please speci y) A5 You cu en a ea o esponsibili y in he company: Accoun ing/Finance Gene al Managemen /S a egy 78 Human Resou ces/IR In o ma ion Sys ems Ma ke ing/Sales Ope a ions/P oduc ion O he : please speci y A6 JSE sec o in which company is lis ed A 7 To al Tu no e : Less han R50 million R50 million o Rl49 million Rl50 million o R499 million R500 o R 1500 million Mo e han R 1500 million Pa B Lis ed below a e ele en s a emen s which ha e a bea ing on he applica ion o sha eholde alue p inciples. Please answe he ques ion by indica ing, in you gene al expe ience, he ex en o which you ag ee o disag ee wi h he s a emen s made. The scale is om 1 = disag ee s ongly o 5 = ag ee s ongly. Bl. The p ima y pu pose o co po a e managemen is o look a e he in e es o he sha eholde s. B2. I he ocus o a company we e solely o ien ed owa ds he in e es o he sha eholde , he in e es s· o o he s akeholde s such as employees and cus ome s would be comp omised. 83. The concep o managing o sha eholde alue is jus ano he ad. 84. 85. 86. 87. 88. 89. Sha eholde alue is des oyed when he economic e u n on capi al (bo h deb and equi y capi al) is less han he cos o capi al o e ime. Ea nings pe sha e (EPS) is a eliable indica o o co - po a e pe o mance. The execu i es' and business manage 's long- enn compensa ion should be di ec ly ied o e u ns o sha e- holde s. The alue o a business is de e mined by he p esen alue o u u e p ojec ed cash lows discoun ed a a isk- adjus ed cos o capi al. The ma ke places emphasis on sho - e m de elopmen in aluing sha es as opposed o longe e m inancial p ospec s. Sha eholde Value Managemen is a inancial manage- men ool. BIO.A company's sha e p ice can be managed o e ime. Bl l. Sha eholde alue managemen canno be applied in Sou h A ica because equi y owne ship is concen a ed amongs a ew la ge co po a ions. Pa C Cl. A wha le el does you company alloca e capi al e- sou ces? Tick one o he ollowing: C2. a. on a p ojec by p ojec basis b. on a SBU basis c. on a g oup by g oup basis whe e each g oup would comp ise o se e al SBUs d. o he , please speci y On wha basis does you company alloca e capi al e- sou ces? Tick one o he ollowing: S .-A .Tydsk .Bed y sleiding 1995 26(2) a. es ima ed sales g ow h b. IRR c. he ne p esen alue o he alloca ion d. he payback o he alloca ion e. O he , please speci y C3. In wha manne a e co po a e inancial a ge s se ? a. F om he op-down wi h ac oss he boa d a ge s o g ow h, cos educ ion and capi al spending b. F om a consolida ion o indi idual SBU a ge s (i.e. om he bo om up) c. O he me hods, please desc ibe C4. Please a e wha you conside o be he h ee mos im- po an measu es o co po a e inancial pe onnance by placing a 1 in he box o he mos impo an , a 2 o he second mos impo an and a 3 o hi d mos impo an measu e. Ea nings and ea nings g ow h Ea nings pe sha e Re u n on in es men Re u n on equi y Re u n on ne asse s Value index= Ra io o Ma ke o Book Value Economic Value Added (measu e o e u n o e & abo e he cos o Capi al) O he , please speci y CS. Do you know wha pe cen age o capi al in he company alloca ed amongs he a ious businesses in you cu en po olio ea ns a e u n supe io o he company's cos o capi al? I yes, please indica e pe cen age. C6. Does you company ca y excess gea ing capaci y? I yes, can you imp o e he company's cos o capi al by aking on mo e deb ? Please explain. C7. Has you company's sha e p ice consis en ly ou pe - onned he ele an JSE sec o index in he las i e yea s? I yes, by app oxima ely wha pe cen age? C8. When you company makes acquisi ions, do you quan- i y he con ol p emium ha will be paid? C9. When you company makes an acquisi ion, do you se a plan o ecap u e he p emium paid? C 10. When you company makes acquisi ions, do you nomi- na e he pe son who will be esponsible o achie ing he s a egic and inancial a ge s p io o he ansac ion ak- ing place? CI I .Do you in eg a e inancial and s a egic planning a he business le el? I yes, How? I no, please explain whe e he esponsibili y o s a e- gic and inancial planning lies. C 12 a. Do you e alua e he p o i abili y (cu en and expec - ed) o he ma ke s in which you pa icipa e as pa o s a egic planning? b. Do you know how changes in s uc u al cha ac e is- ics o he ma ke s you pa icipa e in in luence p o i abil- i y? c. Do you egula ly e-e alua e you decision o pa ici- pa e in a ma ke ? C 13 a. Do you e alua e you p o i abili y (cu en and expec ed) ela i e o you compe i o s as pa o you S.A .J.Bus.Manage.1995 26(2) s a egic planning? b. Do you know how changes in s uc u al cha ac e is- ics o you ma ke s in luence he p o i abili y o you compe i o s'? CJ4.Please gi e examples o key alue d i e s in you po - olio o businesses ha impac on p o i abili y. Cl5.Does app o al o a s a egic plan mean app o al o esou ces (capi al and people) o e he planning pe iod? Cl6.ls he ollowing yea 's budge o each business uni se in he p e ious yea 's s a egic plan? C 17. I a g oup o key co po a e and ope a ing manage s in you company we e asked o iden i y he h ee o i e alue d i e s in each business, would he e be consen- sus? CJ8.Does app o al o a business uni 's s a egic plan commi he head o he business o pe o mance a ge s o he nex yea ? Cl 9.Does app o al o a business uni 's s a egic plan commi he head o he business o pe o mance a ge s o he ollowing yea s (i.e., h ee o i e yea s ou )? C20.Does emune a ion a he head o he business uni le el depend on hi ing he a ge s? C2 l. A c you business uni s s uc u ed along unique ac i i y, p oduc and cus ome lines? Please explain. C22.S a egic Business Uni s ha e ull inancial and ope a- ional au onomy? C23.Do you S a egic Business Uni s ha e a ull inancial 79 exp ession h ough a sepa a e income s a emen and bal- ance shee ? C24.A e ans e p ices be ween business uni s based on one o he ollowing: cos excluding dep ecia ion cos including dep ecia ion ee nego ia ion (in e nal and ex e nal) o he , please explain gene al p ac ice. C25.Is he s a egic planning p ocess coupled o capi al and annual budge ing? C26.ls esou ce alloca ion based on he alue i will c ea e o he sha eholde ? C27.Is esou ce alloca ion pa o a managemen con ac whe eby managemen unde ake o pe o m acco ding o he business plan? I so, is he managemen con ac long e m (longe han h ee yea s)? C28.Is he pe o mance o managemen measu ed in e ms o he cash low gene a ed and/o by accoun ing measu es such as ea nings? Please commen . C29.Is execu i e emune a ion ied o he c ea ion o alue? I no , why? C30.Is emune a ion a he ope a ional le el ied o a ge s ha ha e been dic a ed by alue c ea ing s a egies? I so, does his app oach s ill apply i such a ge s a e sub- op imal e.g. ope a ing plan a lowe e iciencies o coin- cide wi h a ge s de e mined by he alue c ea ing s a egy.