DP16074 Decision rules for long-term value creation

Author(s): Reinier De Adelhart Toorop, Dirk Schoenmaker, Willem Schramade
Publication Date: April 2021
Date Revised: May 2021
Keyword(s): Capital budgeting, financial capital, integrated present value, natural capital, net present value, social capital
JEL(s): G31, G34
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16074

Future-oriented companies manage for long-term value creation (LTVC) rather than merely for shareholder value or stakeholder value. Managing for LTVC involves managing and balancing several types of value (financial, social and environmental) at the same time, often involving trade-offs. Companies need to have decision rules that help them make investment decisions accordingly. This article derives such decision rules by starting from what is needed for LTVC, and by showing to what extent it differs from shareholder value maximisation only. It also outlines transition pathways for companies that are currently value destructive on one of the dimensions. Finally, it introduces a few simple models that allow for the prioritisation of specific types of value, in line with a company's purpose.