Outperform with Expectations-Based Management: A State-of-the-Art Approach to Creating and Enhancing Shareholder Value

1. Content
§ How to incorporate expectations into the corporation’s decision processes to enhance shareholder value
§ EBM → A revolutionary new performance metric that links performance standards, performance measurement, and the achievement of performance
§ The literature on investment management pays little attention to shareholder value → from the perspective of the relationship between corporate managers' behavior and investors' expectations
§ Corporate finance research → sidesteps the issue of how management actions affect investor expectations and stock price discovery
§ Beating expectations drives shareholder value
§ expectations into fundamental management behavior
i. Difficult → because it requires corporate managers to adopt an unaccustomed mindset and focus
§ The Author:
i. Tom Copeland is a distinguished financial scholar who has moved to consulting
ii. Aaron Dolgoff is an associate principal of consulting firm CRA International
§ Managing based on beating expectations through a systematic decision process is the best way to increase shareholder value

2. Sections
a. Measuring performance with expectations
i. Expectations-based management (EBM) → determining which management approach is most correlated with increases in shareholder value → EBM
ii. EBM's underlying intuition is almost too simple:
© Managers must beat the expectations embedded in stock prices → create value
© Achieving what analysts already predict about the company will not create value
b. Managerial implications of expectations-based performance
i. the authors argue that expectations count
ii. The corporate manager's job is to identify investors' most important expectations and systematically include them in all aspects of company behavior
iii. EBM is not a simple lesson but a way of thinking that must be translated into action throughout the company
iv. Example:
© how a company should evaluate a new investment proposal
o The projected return on investment must exceed not only the cost of capital but also investors' expectations for returns on existing projects
v. Copeland and Dolgoff argue that managers need to reverse-engineer the value of the company to determine what the market thinks returns should be
vi. Market's expected return is the hurdle rate that must be met, not for a given quarter but over multiple periods
vii. Clarifying a company's actions to exceed market expectations is the key role of management
viii. Top management has to be driven to beat expectations, rather than rewarded for rising stock prices that merely reflect a general market increase
c. The expectations-based model from viewpoints other than management's