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
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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
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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.