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Value–Based Management with Corporate Social Responsibility$
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John D. Martin, J. William Petty, and James S. Wallace

Print publication date: 2009

Print ISBN-13: 9780195340389

Published to Oxford Scholarship Online: September 2009

DOI: 10.1093/acprof:oso/9780195340389.001.0001

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The Need to Measure What You Want to Manage

The Need to Measure What You Want to Manage

Chapter:
(p.26) Chapter 3 The Need to Measure What You Want to Manage
Source:
Value–Based Management with Corporate Social Responsibility
Author(s):

John D. Martin

J. William Petty

James S. Wallace

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780195340389.003.0003

This chapter first explains the importance of using a single metric to manage the creation of a firm's value. While multiple-measure techniques such as the balanced scorecard can yield valuable information, they fail to provide managers with a means to make necessary tradeoffs. The question then becomes, what metric best measures value creation? The chapter discusses several shortcomings of traditional metrics, both market based (e.g., shareholder return) and accounting based (e.g., net income and return on invested capital). These deficiencies center around the failure of traditional metrics to provide any charge of nondebt financing, therefore leading to a faulty appearance of profitability. Economic profit metrics avoid these pitfalls because they incorporate the magnitude of both the return and the required investment, as well as the opportunity cost of capital. The decision rule becomes simple: Fund projects with expected positive economic profit, and reject the others.

Keywords:   economic profit, shareholder return, balanced scorecard, market value, cost of capital, return on invested capital, net income, ROIC, EP

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