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Blue line management: what value creation really means

Author: Kaiser, Kevin M. J. ; Young, DavidINSEAD Area: Accounting and Control ; Finance Series: Working Paper ; 2009/37/FIN/AC Publisher: Fontainebleau : INSEAD, 2009.Language: EnglishDescription: 13 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: The current economic crisis has raised serious questions about the doctrine of shareholder value maximization. In light of these questions we find corporate executives increasingly expressing doubts and confusion over what the proper goal of their businesses should be. Meanwhile, many observers have taken a perverse delight in holding finance, and especially the theories promoted by finance academics, accountable for the economic collapse. After seemingly countless conversations and debates in which we endeavor to defend finance from the onslaught, we now believe that much of the contentious nature of the discourse has arisen from fundamental errors about what the terms “shareholder value,” “value creation” and “market efficiency” really mean. The most serious error is the tendency to equate share price and other indicators of company performance with value. Much of the blame for this state of affairs rests squarely with finance professionals, especially those who teach in the world’s leading business schools. The problem is that contemporary corporate finance has erected an edifice of terminology and exposition that seems destined to mislead and confuse. Naturally, this confusion has found its way into Wall Street and corporate boardrooms. Our aim is to lift the veil of confusion by offering a framework for value-based thinking that both identifies the source of common errors and offers a way forward. The centerpiece of this framework is a concept we call “blue-line management.” We define it as an approach in which all decisions and resource allocations are made with one aim: to create value. This approach stands in stark contrast to the more common practice of “red-line management” in which value creation may be the stated goal, but the business is managed to deliver on specific indicators, independent of whether these efforts are value creating or value destroying.
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The current economic crisis has raised serious questions about the doctrine of shareholder value maximization. In light of these questions we find corporate executives increasingly expressing doubts and confusion over what the proper goal of their businesses should be. Meanwhile, many observers have taken a perverse delight in holding finance, and especially the theories promoted by finance academics, accountable for the economic collapse. After seemingly countless conversations and debates in which we endeavor to defend finance from the onslaught, we now believe that much of the contentious nature of the discourse has arisen from fundamental errors about what the terms “shareholder value,” “value creation” and “market efficiency” really mean. The most serious error is the tendency to equate share price and other indicators of company performance with value. Much of the blame for this state of affairs rests squarely with finance professionals, especially those who teach in the world’s leading business schools. The problem is that contemporary corporate finance has erected an edifice of terminology and exposition that seems destined to mislead and confuse. Naturally, this confusion has found its way into Wall Street and corporate boardrooms. Our aim is to lift the veil of confusion by offering a framework for value-based thinking that both identifies the source of common errors and offers a way forward. The centerpiece of this framework is a concept we call “blue-line management.” We define it as an approach in which all decisions and resource allocations are made with one aim: to create value. This approach stands in stark contrast to the more common practice of “red-line management” in which value creation may be the stated goal, but the business is managed to deliver on specific indicators, independent of whether these efforts are value creating or value destroying.

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