Value-Based Management and the Corporate Profit Centre

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Value-based management (VBM) has been defined as a means of making explicit the link between a company’s strategic and operating decisions and their effect on shareholder returns. As such it should be the natural framework for aligning executive incentives with the interests of stock market investors (Ittner and Larcker, 2000).

While many firms have embraced the VBM phenomenon in recent years, at least in their communication with shareholders, it is far from clear that value-based management has really had any significant impact on internal management systems. Large survey articles on executive compensation in the US, such as that by Murphy (1998), strongly suggest that the new metrics are not being widely applied internally. This begs the question of whether diffusion is still at an early stage, or whether there is a gap between hype and reality. Could value-based management simply be another management fad?

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