In the increasingly competitive world, each corporate decision you take must make financial sense, says Matti Suominen, Professor of Finance at the Aalto University, Finland. During his 20-year career in academia, which has seen him teaching at INSEAD, Wharton, IESE, HEC, the Chinese University of Hong Kong, and now Aalto University, Suominen has observed firsthand that organizations who consistently measure the value impact of their decisions achieve better results than those who do not.
Organizations can no longer make decisions lightly"
“Organizations can no longer make decisions lightly, as otherwise they are driven out by the efficiency-seeking private equity firms that leave nothing to chance,” Suominen says.
Value-based management means calling attention to capital efficiency: inventory management, the amount of accounts receivable, and the efficiency of the company’s billing process. It also means investing in sectors that create the most added value, and choosing low-cost financing options to fund the business. In other words, measuring economic value and recognizing it as the leading principle in running the company.
Small changes can make a big difference
The benefits of value-based management can be seen with the naked eye. They are also backed by academic research, says Suominen, who teaches in the Diploma in Corporate Financial Management program at Aalto EE.
According to Suominen, value-based management pushes up share price as it helps make sound decisions, secure company resources, and survive competition.
“I have come across companies who have spent billions of dollars without calculating the net present value of their investments. Needless to say, those investments backfired. One company at least did some calculations but still ended up investing six billion in a licence, only because they had a typo in their Excel sheet. This company also lost most of its market value as a result. There are still companies who don’t pay attention to cash flow or, say, capital tied up in receivables; they only look at profits,” Suominen says.
There are still companies who don’t pay attention to cash flow or, say, capital tied up in receivables; they only look at profits."
Suominen compares the situation to everyday life. We all know the benefits of a healthy lifestyle – it controls weight, improves mood, combats diseases, boosts energy, and improves longevity – yet for many it’s still hard to change habits and they need advice on what to eat and how to exercise.
“It’s the same in business. Looking at your business decisions from the point of view of economic value brings along a variety of benefits: even the smallest changes to how you operate your business can produce surprisingly good results.”
Private equity firms set the bar
The growing importance of value-based management is driven by two concurrent trends.
The first trend Suominen mentions is the emphasis on shareholder value. Whereas in the 1980s, it was common both in Europe and in the United States that executives considered other stakeholders more important than shareholders, now the situation is totally different.
“During the past ten years, we have found ourselves at the other extreme. Private equity firms have gained ground, and these are organizations that very effectively and aggressively drive shareholders’ interest only, and create value from increased efficiency: lower working capital, lower taxes, higher incentives, and a “pennies count” mentality,” Suominen explains.
To withstand competition, other companies must understand how private equity firms operate, and adopt their best practices.
The second trend behind value-based management is the growing volume of mergers and acquisitions. "
The second trend behind value-based management is the growing volume of mergers and acquisitions. The number of M&A transactions has increased both in the Nordic countries and worldwide in the past few years. Some 5–10 percent of assets change ownership every year, Suominen says. This is partly due to the proliferation of private equity firms, and partly because it has become a habit for many companies to buy out competitors to obtain access to new resources, markets, and technologies.
“The M&A process involves several parties, each with their own interests. Executives need to be aware of what is happening and why, and protect their own interests. Bankers and corporate M&A departments, for example, may be inclined to conclude more transactions than is reasonable,” Suominen says.
Do you know what creates and what destroys company value?
Combined with the ruthless competition, the business mechanic described above means that to succeed in this world, executives must master the key aspects of financial analysis and value based management.
“To have a positive impact in your organization, to be heard, and to understand what’s being discussed, you must know how to speak the language of finance. By being better informed, you can make better decisions and be fully aware of the consequences of your actions,” Suominen emphasizes.
You must know how to speak the language of finance."
Aalto EE’s Diploma in Corporate Financial Management program, directed at non-financial executives, CEOs, business unit heads, lawyers, bank relationship managers, board members, advisors, and consultants, provides participants with the opportunity to deepen their understanding of the main elements of corporate finance.
They learn how to read and analyze financial statements, how to assess the shareholder value impact of investments, mergers and acquisitions, and other corporate actions, and how to allocate resources in a value-based manner. They also learn to understand what drives the share price and how firms, including startups, should be financed.
“The program can be of tremendous benefit to someone who’s built their career in, say, engineering, marketing, or law, and then risen up to an executive position with a profit and loss responsibility. They need a fast path to financial literacy to talk to investors, other corporate executives, and the press, and to understand what really creates and what destroys company value,” Suominen concludes.
The 2017 Diploma in Corporate Financial Management program received excellent customer feedback. Instructor Matti Suominen's knowledge and expertise, suitability of content and teaching skills and methods all received a full 6.0/6.0. Read more!