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165stakeholder Approach to Identification and Analysis of value Creation Drivers*
Olga EFIMOVA, Ph. D, Professor
Economic Analysis Department, Financial University [email protected]
Veronica SAMOHINA
Economic Analysis Department, Financial University [email protected]
Abstract. The study presents the methodology of identification, selection and analysis of the value creation drivers. At the first stage of the study groups of key stakeholders were selected and their interests were estimated. The results of analysis helped to identify the indicators that reflect the mutual interests of the company and the stakeholders. Then, in the next step, based on the provided econometric model the most significant factors of the value creation were determined. The practical part of the research was carried for Group Cherkizovo as example.
The study has allowed to generate practice-oriented methodology for the identification, selection and analysis of the creating value drivers. The proposed methodology can be applied to any companies without significant corrections.
Аннотация. В исследовании представлена методология выявления, отбора и анализа факторов создания стоимости компании. На первом этапе исследования проводится отбор групп ключевых стейкхолдеров, анализ их интересов и определение показателей, отражающих взаимные интересы компании и стейкхолдеров. На следующем этапе на основе разработанной эконометрической модели выявляются наиболее значимые факторы создания стоимости компании и группы ключевых стейкхолдеров. Практическая часть исследования осуществлялась на примере компании ОАО "Группа Черкизово". Проведенное исследование позволило сформировать практико-ориентированную методологию выявления, отбора и анализа факторов создания стоимости компании. Предлагаемая методология может быть применена к любой выбранной для анализа компании без внесения существенных корректировок.
Key words: Stakeholders, stakeholder analysis, value creation, stakeholder value, value drivers identification.
introduction
In recent decades (for Russia this period can be estimated as a much shorter time interval) there have been very significant changes in the understanding the ultimate goals of companies, ways to measure their achievements, as well as the choice of specific performance indicators. The idea that the purpose of business is value creation is getting more common. This approach is well known as Value-Based Management, or VBM (managing for value); it has replaced the former one, oriented solely on profit.
Accordingly, for the purposes of evaluating the company performance that were based primarily
on the quantitative analysis of profitability (ROA, ROE, ROCE, and others) indicators characterizing the ability to create value-added (EVA, MVA, SVA, SFROI) are used.
Among the reasons that led to change in the priorities of efficiency criteria selection the following should be outlined:
• Usage of traditional measures of profit and profitability allows varying the accounting estimates;
• Traditional measures based on accounting profit and profitability ratios calculation ignore some kinds of intangible assets;
• Risk factors and required return on invested capital are excluded from consideration;
* Стейкхолдерский подход к выявлению и анализу факторов создания стоимости.
• Focus on getting results in the current period and ignoring the possible effect in the future. A typical example of this is return on investment indicator (ROI) and its modification, which tends to decrease during the period of investment that may force to refuse profitable projects;
• Emphasis on internal factors. At the same time, to compete in the market successfully it is necessary to take into account external factors such as actions of competitors and customer satisfaction;
• Historical nature of the data used for the calculation of financial indicators;
• Lack of a coherent vision of business, the inability to build a business model for identifying the most important success factors and their interaction.
Despite the differences in calculation they all are based on common approach — value creation is recognized if actual return on investment is higher than the required return. Taking into account that the required rate of return is usually used the weighted average cost of capital (WACC) it is possible to conclude that added value is created only when companies get a return on invested capital that exceeds the cost of capital. The logic in this case is the following: the return on investment must be higher (or not less) than the value of its financing.
In view of this, the assessment of business performance in the long term is primarily based on indicators of value creation.
Despite the growing popularity of the value approach, both in theory and in practice there is a number of critical issues that need additional consideration. Among them, especially, it is necessary to highlight the following:
• What kind of company value (market, shareholder, other) should be considered as the objective function?
• Who and how creates value for business?
• What is the goal of value creation?
• How do market participants share created value, and others.
• We will try to assess the situation and questions raised.
background & theory
The concept of VBM is aimed at solving the strategic objectives of the organization by focusing on the key drivers of value. However, all of the measuring instruments for value added (EVA and others) evaluation are based on the calculation and interpretation of solely financial performance. At the same
time, as it has been repeatedly discussed and argued in a huge number of domestic and foreign researches (Berman S.L., Wicks A.C., Koteha S., 1999; Cornell B., Shapiro A.C.,2007; Erkki K. Laitinen, 2004; Perrini, F. & Tencati, A., 2006), the key conditions of long-term value creation are connected with non-financial factors such as competitive advantages, customers and staff loyalty, supply chine and others. Moreover, non-financial factors affect financial performance. As result it is possible to conclude that the effective management of non-financial factors allows the company to achieve success, that can be measured by financial indicators (sales dynamics, optimize the cost of capital optimization, economic value added creation). In this case financial ratios are used as a benchmark.
To sum up it can be concluded that analysis of long-term value creation is based on both financial and non-financial factors evaluation.
There are different approaches that became internationally known, which are based on integrating financial and non-financial factors.Well-known in Russia and abroad are the system of comprehensive economic analysis of entities by A.D. Sheremet, Balanced Scorecard of Kaplan and Norton (Balanced Scorecard), SMART system by Cross and Lynch, and others.
Non-financial value drivers, ensuring long-term value, are formed with the participation and under the influence of a wide range of stakeholders (individuals and legal entities). The value of relationships with these parties is so high that, along with the theory of shareholder value the concept of stakeholder value (the stakeholder approach) is getting more popular.
Currently the stakeholder approach is a strategic management tool of long-term value creation. It is based on the understanding that the external and internal stakeholders, interacting and often conflicting with both the company itself and with each other, have a direct impact on its long-term sustainability.
The key concept of stakeholder theory of the firm is the idea that the goal of the company is much broader than wealth for its owners. It takes into account not only the interests of the owners, but also a much wider variety of agents — the stakeholders (Freemen R.E., 2010).
Considering the requirements and interests of the various stakeholders leads to increasing confidence in the organization that contributes to relational capital creation, and thus in turn creates the necessary (though not sufficient) condition for stakeholder value creation.
Table 1. Comparative analysis of shareholder and stakeholder value creation approaches*.
Aspects of comparison shareholder value approach stakeholder value approach
Kind of decisions Financial decisions relating to raising and investing of capital Strategic decisions of comprehensive character
Area of implementation Valuation Strategic management
Methods of analysis Quantitative Qualitative
Persons and parties interested in the analysis Shareholders, Investors Stakeholders
The subject of analysis Cash Flow Communications
Resources Financial All resources, including financial, operational, human, natural, intangible.
* Based on research of Figge F., Shaltegger S. (Figge F., Shaltegger S., 2000).
The stakeholder value concept is based on its key statements, such as:
• The value is not created solely by the organization itself or inside;
• The value is under the influence of external factors, risks and opportunities forming the environment in which the company operates;
• The value creates by joint efforts through relationships with stakeholders (customers, suppliers, society etc.).
• The value depends on the availability, accessibility, management of resources and types of capital (financial, industrial, intellectual, natural and social) that stakeholders provide (Freemen R.E., 2010).
There is a fundamental question of the relationship between shareholder and stakeholder value approaches — whether they are alternative or complementary. The position of authors is that these concepts cannot be regarded as mutually exclusive. Moreover, the concept of stakeholder value is a logical development of the shareholder value concept, because it allows to identify and to analyze the factors of shareholder value creation over the long term. Table 1 shows the results of a comparative analysis of two approaches to support this thesis.
As we can see, there is complementary relationship between the two concepts. Management of economic benefits in the form of market value or shareholder value added requires identification and analysis of non-financial factors discussed above. Non-financial value drivers, such as staff qualification and motivation, customer loyalty, effective communication, environmental and social responsibility, innovation, impact on the relevant financial drivers: sales, profit, return on invested capital, EVA, and as result influence market capitalization.
The recognition of relationship factors requires further study of the impact of non-financial factors on key indicators of value. Firstly it is necessary to find out which non-financial factors are most im-
portant for the analyzed company, and therefore the analysis of the interaction with which stakeholders is a priority for the company.
hypothesis development
The above-mentioned analysis highlights the dependence of firm's value and its sustainable long-term growth on the effectiveness of company's interaction with stakeholders to a significant extent. This, in turn, indicates the necessity of identification and the consequent prioritization of stakeholders, as the selection of the most significant factors influencing the firm's value can only be made possible by means of appropriate identification of the most influential stakeholders. Taking into account that effective company value management is not possible without identification of the most important factors of influence, the above-mentioned analysis results in formulating the following hypotheses:
Hypothesis 1. It is possible to develop the model that would combine both financial and non-financial factors in order to evaluate their influence on stakeholder's value of a firm.
Hypothesis 2. This model will allow to separate significant factors from insignificant, and to provide quantitative assessment of the impact of significant factors on stakeholder's value of a firm.
Hypothesis 3. While electing factors for the model it is crucial to take into consideration business sector specifics and strategy of the firm in study.
research methods
In order to test the formulated hypotheses a research is conducted, based on applying modern econometric methods, such as regression analysis. The database for the research was created mainly by using sources such as firm's accounting and finan-
Table 2. Key stakeholders selection.
Key stakeholders Factors of stakeholder value creation Comments
State Taxes Tax rates reflect the quantification of the relationship between the state and the firm.
Business owners EVA Economic value added reflects the amount of value added created by a firm over a period. Business owners care about company development and gaining in a long-term perspective, so, from the point of view of business owners, EVA appears to be optimal as a factor of creating stakeholders value.
Consumers Price for 1 kg of pork Quantitative factor that significantly influences consumers' decision to purchase or not to purchase the firm's goods.
Staff Salary Salary is an economic expression of the employees' motivation to continue working for Cherkizovo company.
Competitors Revenue of OMPK Cherkizovo company and OMPK company are direct competitors, which means that they compete for the volume of consumer demand for the produced goods. The volume of consumer demand is directly related to the firm's sales volume, which, in turn, correlates with the volume of revenue.
Table 3. Factors of creating stakeholder value of a firm for each group of significant stakeholders. Semi-annual data was taken for Cherkizovo Group over the period of 2008 to 2013:
Index Index calculation methodology
Taxes Index was taken from income statement of Cherkizovo Group.
EVA Index was calculated according to formula: EVA = NOPAT - WACC*CE - NOPAT - operating profit after income tax; Operating profit and income tax rates were taken from the income statement of Cherkizovo Group. Calculation of NOPAT is presented in Table 4. - CE - capital employed; Volume of capital employed is calculated as a sum of total liabilities of a firm and its equity excluding current liabilities. Calculation of CE is presented in Table 5. - WACC - weighted average cost of capital; WACC data was taken from Bloomberg database and presented in Table 6.
Price for 1 kg of pork Index was taken from Bloomberg database.
Salary Index was taken from accounting reports of Cherkizovo Group.
Revenue of OMPK Index was taken from income statement of Cherkizovo Group.
table 4. Formation of research information base.
taxes, operating Profit, nopat,
thousand dollars thousand dollars thousand dollars
2008 1 462 103468 102006
6 months of 2009 2 112 62 933 60 821
2009 -3 347 140190 143537
6 months of 2010 3 246 84 861 81 615
2010 4 145 166968 162823
6 months of 2011 2 465 75 402 72 937
2011 5 819 168454 162 635
6 months of 2012 2 400 107794 105 394
2012 -14281 232139 246 420
6 months 2013 3 855 25 121 21 266
2013 2 121 88 664 86 543
Table 5. NOPAT calculation.
Current liabilities Long-term liabilities Capital Free sources of funding CE
2008 344 357 362268 425149 140822 990952
6 months of 2009 226193 366136 454561 119217 927673
2009 217072 407640 545405 130948 1 039169
6 months of 2010 189227 381429 600756 116723 1 054689
2010 306367 494 931 638 586 138773 1301111
6 months of 2011 459770 622837 755902 188653 1649856
2011 358315 575125 757441 171925 1518956
6 months of 2012 338965 529778 833200 159959 1541984
2012 564 702 549 232 950963 195476 1 869421
6 months 2013 552261 564 483 925301 173969 1 868076
2013 533502 535084 952481 212061 1 809006
Table 6. WACC data from the Bloomberg database.
Period wacc Period wacc
2008 0,035 2011 0,07
6 months of 2009 0,035 6 months of 2012 0,07
2009 0,098 2012 0,044
6 months of 2010 0,098 6 months 2013 0,044
2010 0,115 2013 0,083
6 months of 2011 0,115
cial statements, sustainability statements, industry analytics, as well as data taken from Bloomberg database.
The suggested hypotheses were tested on the example of OJSC Cherkizovo Group. At the first stage of research a firm industry analysis as well as company strategy analysis was conducted. This stage resulted in identification and prioritization of stakeholders that are most significant for the firm. The stakeholders that were recognized as the most significant for Cherkizovo Group are as follows:
State. This is primarily connected with the fact that the firm operates in Russian meat industry, and this industry is getting considerable financial support from the state, for instance, by subsidized interest rate, which eventually affects the cost of raising debt capital.
Business owners. Without this group of stakeholders the existence of a firm would not be possible, as these are business owners that provide such indispensable asset as owner's equity.
Consumers. Revenues and profit of a firm mostly come from selling the goods to the consumers. This makes existence of a firm impossible without this group of stakeholders.
Staff. In modern world human capital is considered to be one of the most important resources, thus, when considering the interests of stakeholders, such group as firm's employees cannot be ignored.
Competitors. The Russian meat industry market where Cherkizovo Group operates is highly competitive, so direct competitors of a company in question have strong influence on the results of company's activities, for example, on company's revenues. Against this background, this stakeholders group should also be considered when building a stakeholders value of a firm creation model.
At the second stage of the research a quantitative index that reflects mutual interests of a firm and its stakeholders in a best way, was assigned to each of the groups of stakeholders.
The following tables provide information used and reflect the sequence of calculations.
Market value of the firm was used for estimating firm's value, as this index reflects market evaluation of a firm, and therefore by definition takes into consideration maximum number of factors and data sources available on the market.
Thus, at the second stage of research database was developed to be used in further research.
Table 7. Formed information base of research.
Market value of the company Taxes eva Price for 1 kg of pork Revenue of ompk salary
y X1 X2 X3 X4 X5
2008 2929,1468 1462 67322,68 1,986551724 13963154 80004
6 months of 2009 10930,52145 2112 28352,445 1,646495726 8284202 30118
2009 18931,8961 -3347 41698,438 1,759603175 17311388 66450
6 months of 2010 28161,70555 3246 -21744,522 1,600630631 8589332 38056
2010 37391,515 4145 13195,235 1,9736 18852057 78387
6 months of 2011 30741,59745 2465 -116796,44 2,422719298 10094241 50681
2011 24091,6799 5819 56308,08 2,873032787 22276587 110819
6 months of 2012 24015,52355 2400 -2544,88 2,450336134 12041010 64370
2012 23939,3672 -14281 164165,476 2,327822581 25795195 131611
6 months 2013 24598,7635 3855 -60929,344 2,285798319 12828203 77884
2013 25258,1598 2121 -63604,498 2,493809524 26043260 153738
model specification and regression analysis
Research was conducted with the help of modern econometric methods and regression analysis. Reference econometric model reflects a numerical dependency of stakeholder value of a firm as a function of selected factors of creating stakeholder value of a firm. In this research reference econometric model is expressed by the following regression equation:
Y -a0 + al*xl + a2*x2 + a3*x3 + a4*x4 + a5*x5 + u, where
Y — stakeholder value of a firm, expressed numerically as market capitalization of a firm. This is endogenous variable, that depends on several re-gressors: xl, x2,...,x5.
xl, x2,...,xk — factors of stakeholder value of a firm creation. These are exogenous variables that explain endogenous variable Y.
Х1 — tax rate for Cherkizovo Group;
Х2 — EVA for Cherkizovo Group;
Х3 — price for 1 kg of pork;
Х4 — revenue of OMPK;
Х5 — salary for Cherkizovo Group employees.
Dependence between stakeholder value of a firm and selected factors is represented as a sum of products of factor scores and specific coefficients, as, from economic point of view, it is suggested that each factor contributes to creation of stakeholder value of a firm.
The following tests were consistently applied to initial specification of regression model:
I. In order to select an optimal functional form for regression model Schwarz information criterion was implemented.
The concept of Schwarz information criteria suggests that when selecting the best out of all possible options of functional forms of regression equations that were tested, the model with the lower value of BIC is the preferred one.
D7n 1 ~ 2 (k + 1)ln n
BIC = lna2 + ----, where
n
a2 — sample variance of the residuals calculated as residual sum of squares divided by the number of observations.
(k+1) — number of independent variables, including intercept. In this case (k+1) equals to 6.
n — number of observations. In the case of this research n equals to 11.
Implementation of Schwarz information criterion resulted in developing the following econometric model that reflects the stakeholder value as a function of selected factors:
Y - a0 + al *xf + a2 *x2 + a3 *x33 + a4 *x43 + a5 *x53 + ut
II. In order to test the significance of the model F-test was conducted. In an F-test observed F-sta-tistic from Table 8 is compared to F-critical. Observed F-statistic for this model equals to 6.234, while F-critical equals to 4.347. As F-critical is less
Table 8. Least squares method for the t-test.
Regression statistics
Multiple R 0,876077324
R-squared 0,767511477
Normalized R-squared 0,535022955
Standard error 6357,143776
Observations 11
df MS F F — significance
Regression 5 133415850,3 3,301287603 0,107962307
Residue 5 40413276,98
In total 10
Coefficients t-statistic P-value Lower 95%
Y-intersection 16488,39167 3,778687715 0,012907261 5271,598082
Variable X 1 -3,00522E-09 -0,888274024 0,415076201 -1,17021E-08
Variable X 2 -0,159674561 -3,690700396 0,014135336 -0,270888283
Variable X 3 -40,61537617 -0,097215263 0,926332063 -1114,573778
Variable X 4 4,20405E-18 3,119446102 0,026268671 7,39699E-19
Variable X 5 -2,06158E-11 -3,067142992 0,027874303 -3,7894E-11
than F-observed, the regression model in question is recognized as significant.
III. In order to test the significance of the re-gressors in the model least squares method and t-test were applied. The significance of the regressors is verified by testing significance of corresponding regression coefficients. T-test method suggests that for each of the coefficients in the model observed t statistic is compared to critical t-value.
Conducting a t-test for the econometric model proved the following regressors to be statistically significant: intercept, regressor X2 (EVA), regressor X4 (revenue of OMPK company) and regressor X5 (salary of Cherkizovo company's employees).
The resulting econometric model is as follows:
Y -a0 + a2*x2 + a4*x34 + a5*x3 + ut
IV. Pairwise correlation coefficients were used to test the model for multicollinearity, or correlation between regressors which would not allow the recognition of obtained results as distinct and suitable for definitive interpretation.
In regression model in study regressors X4 and X5, namely revenues of OMPK company and salary of Cherkizovo company's employees, demonstrate collinearity. From the point of view of common sense, such result can be motivated by the fact that both companies operate on the same market of Russian meat industry. In order to eliminate the negative influence of multicollinearity on the quality of the model and further interpretation of obtained results, the cause of multicollinearity, namely one of the multicollinear variables is to be eliminated. Re-gressor reflecting the salary of Cherkizovo company's employees was removed within this research. Thus, at the stage of primary testing the final version of the regression model was as follows:
Table 9. Values of pair correlation coefficients for significant covariates.
Corr (X2; X4A3) 0,38999867
Corr (X2; X5A3) 0,157428741
Corr (X4A3; X5A3) 0,937138161
Y = a0 + a2*x2 + a4*x4 + ut
V. Goldfeld-Ouandt test and Durbin-Watson test were conducted on the model to detect the presence of heteroskedasticity and autocorrelation in the residuals correspondingly. Presence of heteroskedas-ticity and autocorrelation in the model decreases the quality and precision of obtained evaluations of model parameters, and eventually decrease the quality of interpretation of obtained results. Goldfeld-Ouandt test and Durbin-Watson test conducted on studied model demonstrated the absence of heteroskedastic-ity and autocorrelation in the residuals.
VI. Confidence interval method was applied to the model to test its reliability. Results of application of this method indicate that the regression model under study can be recognized as reliable.
Thus, application of modern econometric methods resulted in developing reliable regression model of high explanatory and predictive power, and precision. This model contains only significant regressors, so that only truly significant factors of value creation are included:
Y =15767,285 - 0,141*x2 + (4,36E - 18)*x4
economic interpretation of obtained results
Conducted analysis of stakeholder value of Cherkizo-vo Group demonstrated that EVA and OMPK company revenue are significant factors of creating stakeholder value of this company. For every standard unit increase in EVA there will be a 0.141 standard unit decrease in stakeholder value of Cherkizovo Group. Decrease in stakeholder value as firm's value added increases over a period may seem unexpected as a result, but can be explained by the fact that stakeholder value reaction to increase or decrease in EVA lagged behind. Consequently, EVA may have been positively correlated with stakeholder value of a firm, if this factor were represented as lagged variable.
Developed regression model demonstrated positive correlation between stakeholder value of the firm and revenue of OMPK company which is direct competitor to Cherkizovo company. This means that increase in OMPK company revenue is followed by increase in stakeholder value of Cherkizovo company. This can be explained by the fact that both companies are operating on the same market of Russian meat industry, and thus are both prone to the tendencies of this market, such as seasonality of demand. In this case economic meaning of the intercept in the model
is the impact of unaccounted factors on stakeholder value of a firm.
It should also be mentioned that EVA index reflects not only firm's relationships with stakeholders, but also with the state, as in order to compute this index it is needed to consider WACC, which value directly depends on the state subsidizing firm's interest rate on loan.
Thus, EVA and OMPK company revenue are recognized as significant factors of creating stakeholder value for Cherkizovo company, while business owners, direct competitors and the state appear to be key stakeholders.
results of hypotheses testing
The first hypothesis claimed that a model could be developed that would allow to combine both financial and non-financial factors in order to evaluate their impact on stakeholder value of a firm. Indeed, the conducted research demonstrated that such model could be obtained. The model developed as the result of research is reliable and possesses predictive and explanatory power. Comprehensive analysis of industry segment where the firm operates as well as analysis of the firm's strategy and specific features of its operations should be included in processes of building a database for developed model and selection of significant factors. Accounting and financial statements, sustainability statements, firm industry analytics, as well as data taken from independent databases, e.g. Bloomberg database, can serve as sources of information for primary data.
The second hypothesis suggested that the model would allow to separate significant factors from nonsignificant, and to quantitatively evaluate the impact of significant factors on stakeholder value of a firm. As a result of the application of econometric methods, such as t-test and F-test, to the model, the analysis of overall significance of the model and significance of each separate factor was provided. As a result of this stage of research, the significant regressors — those that influence the creation of the value of a firm — were selected.
The third hypothesis indicated that in order to select the proper factors for the model it is necessary to take into account industry specifics and strategy of a firm in study. This hypothesis proved to be correct, as both firm's strategy and industry specifics (e.g. active financial support to the industry provided by the government) were considered when selecting the factors of stakeholder value creation for initial regression model, and this prevented from omitting such an important stakeholder as the state is. At the same time,
the regression model did not include cattle food suppliers as significant stakeholder, as Cherkizovo Group is a vertical integrated group and thus provides food for its livestock from its own resources, whereas for other companies in this industry it would be vital to include cattle food suppliers into the model as they would appear to be key stakeholders.
conclusion
This research demonstrates the application of developed methodology of identification, selection and analysis of factors of creating a firm's stakeholder value, through the example of Cherkizovo Group. In addition, the developed methodology can be used for analysis of stakeholder value creation factors for any company. The example of Cherkizovo Group demonstrates the algorithm of application of this methodology, which includes, first of all, the identification of key groups of stakeholders for a firm in study. Secondly, it includes the estimation of key stakeholders' interests and conversion of qualitative interests into corresponding quantitative variables. Next stage is building initial regression model that reflects dependence of stakeholder value of a firm from selected potential factors of value creation. Modern econometric methods help to eliminate non-significant factors stepwise, while the model is checked for overall significance, quality and reliability. The resulting regression model allows to draw conclusions about which factors influence a firm's stakeholder value creation, and to provide a quantitative estimation of their influence. This algorithm can be applied to any firm.
Undoubtedly, the application of this algorithm for a specific firm demands that the firm's industry sector, strategy and operations specifics, as well as limits on available database, are to be taken into account. Nevertheless, the methodology of analysis itself stays unchanged.
Thus, the developed methodology appears to be practice-oriented instrument that helps firms to build relationships with key stakeholders in an effective way. This allows business owners and firm's top management to gain an opportunity of having successful long-term sustainable development, as well as a possibility to manage the value of the firm in most effective way.
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