The Purpose of the Firm, Valuation, and the Management of Intangibles

Journal of Applied Corporate Finance, Vol. 29(2), Spring 2017

16 Pages Posted: 5 Sep 2017

See all articles by Bartley J. Madden

Bartley J. Madden

Center for Advancing Corporate Performance

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2017

Abstract

This paper provides a different way of thinking about, and dealing with, four important issues. First, the overarching purpose of a firm involves communicating a vision, organizing to survive and prosper, working continually to develop win-win relationships, and taking care of future generations. Maximizing shareholder value is then positioned not as the purpose of the firm, but as the result of a firm achieving its purpose. Second, managements and boards need a valuation model that provides a clear and insightful connection between long-term corporate performance and market valuation. A strong case is presented for the life-cycle valuation model, widely used by money management organizations, in which a firm's projected cash flows reflect an expected "fade" in both economic returns on capital and reinvestment rates. The potential uses of this model are illustrated with a life-cycle track record for 3M, 1960 to 2014. Third, an alternative to the accounting approach of capitalization and amortization of intangibles is a valuation approach that puts the future benefits from intangibles into more favorable forecasts of long-term fade rates. Fourth, incorporating Life-cycle Reviews for each of a firm's business units as part of its integrated report could improve management's resource allocation decisions, help build a shareholder base of long-term investors, and provide management with the support and confidence to resist Wall Street's excessive emphasis on quarterly earnings.

Keywords: Purpose, Maximizing Shareholder Value, Valuation Model, Life Cycle, Intangibles, CFROI

JEL Classification: D21, G10, G12, G30, G34, G38, L21, M10, M41

Suggested Citation

Madden, Bartley J., The Purpose of the Firm, Valuation, and the Management of Intangibles (June 1, 2017). Journal of Applied Corporate Finance, Vol. 29(2), Spring 2017, Available at SSRN: https://ssrn.com/abstract=3013310

Bartley J. Madden (Contact Author)

Center for Advancing Corporate Performance ( email )

565 West Adams
Chicago, IL 60661
United States

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