bindex_copeland.qxd 7/19/05 4:18 PM Page 351

Index

10-year bond spreads, 129 Audits, 153 Aventis, 232–233 A A.G. Edwards, 200 B Abbott, 232–233 Balanced scorecard, 14, 287, data, 248–249 303–305, 307 Accounting profits, 302 of America, 200 Accounting-based metrics, 302 Bank One, 109 Acquisition, 91 Barber, Lehary, McNichols and AES, 108–111 Trueman, 164, 346 ALCAR, 287 Baseline capital expenditure Allen, Bob, 248 (Baseline Capex), 60–66 Allocating capital to , 58 Batch size, 264 Analyst earnings expectations, 109, Berkshire Hathaway, 192–194, 230 168 Beta, 133, 134, 140 bias of, 164–165 Bethlehem Steel Company, 70–71 sources of analysts’COPYRIGHTED information, Biased MATERIAL reporting policy, 194 280–281 Black, Fischer, 202 Anslinger and Copeland, 220 Bonus, expected, 227, 234 A-rated bond yield spreads, 129 unexpected, 227 Arbitrage profits, 284 Bonus bank, 224 Arithmetic average, 133 Bristol Myers, 231–233 AstraZeneca, 231–233 Brown, Robert, 194 AT&T, 14, 248 Budget padding, 121

351 bindex_copeland.qxd 7/19/05 4:18 PM Page 352

352 Index

Budgeting and planning, xviii Capital turns, 259, 265 Budgeting dialog, 84–87 CFROI, 23, 287, 289–291, 295–297, Budgets as excuse to lie, 83 300, 306–308 Buffet, Warren, 192–194, 230 Chevron, 15, 230 Bureaucracy, 154 , 224 disruption costs, 142 Clientele effects, 283–286 Business life cycles, 71 tax clientele effects of dividend Business risk, 124 policy, 284–285 Business unit, 141 Coca-Cola, 13, 152 performance measurement, 34, 56, Communicating with investors, xvii, 307 34–35 Buy-side analysts, 165, 207 Communicating expectations, 336 buy-side research, 328 Communications plans, 209 Compensation C Factors affecting CEO compen- Campbell and Wansley, 275, 349 sation, 221 Cannon Mills, xii Line versus staff, 235 Capacity utilization, 154–156 -term compensation, 227 Capital asset pricing model (CAPM), Managerial power approach, 47, 125, 132, 135 214–215 Capital budgeting process for Optimal contracting approach, baseline capital, 73–78 214–215 Capital efficiency, 147–162 Competitive intelligence, 280 budgeted spending, 149–150 Conditional budgets, 121 capital efficiency process, 160–161 Contingent convertible , capital inefficiency, 153 317–318 cures for capital inefficiency, Continuing value (CV), 169, 298 153–160 Copeland and Friedman, 310, 349 incentives and, 153 Core assets, working harder, 47 myopic planning, 150–152 Corporate bonds, 128 planning in, 158–159 Corporate cost of capital, 141 seasonal spending, 150 Cost equity, 60, 94, 125, 132–134, symptoms of Out-of-Control 140, 275 Capital Budgeting, 149–153 Cost of debt, 125, 126–132, 140 tradeoffs, 152–153 Cost of preferred stock, 125 Capital gains, 218 risk spread, 128 , 130, 140–144 Cross-business issues, 254 changes in, 188 Crystal, Graef, 221 target, 130 CSX, 258 Capital suspense accounts, 73 Curve fitting, 295 bindex_copeland.qxd 7/19/05 4:18 PM Page 353

Index 353

D for government, 329–331 Dann, 185 implementation, 252–253 -free , 132 measure of one-period Depreciation tax shield, 298 performance, 15–16 Disclosures, 311–313 metrics, 25 corporate and line subjective nature, 17, 24–25, compensation, 325–327 338–339 EBM perspective, 318–319 three-part system, xviii, 243–244 financial disclosures, 202 training schedule, 257 form 8-K disclosure requirements, Eccles, Robert, 204, 347 322–324 Economic profit, xiii, 57, 60, 93, 244, insider transactions and holdings, 302 327–328 EP, the failure of it as a measure segment-based information, of business unit performance, 17 324–325 , (EVA®), xiv, Discounted Flow (DCF), 92 23, 6, 39, 289, 306–308 model, 43, 244, 334 definition, 60 Discretionary pools of funds, 121 discounted, 289, Dittmar and Dittmar, 187, 347 growth in, 334 Divestiture, 104–108 Economies of scale, 262 Dividends, 185 Ehrbar, Al, 302 DuPont, 148 Eli Lilly, 232–233 Duration, 125 Elton and Gruber, 284, 349 Emerson Electric, 35, 291 E Enron, 181, 195–198, 311 Earnings game, 180 Entity value, 170 Earnings smoothing, 202 Excess marketable securities, 266 Earnings-based measures, 7 Exit decisions, 107 EBM, 60, 292–292, 307 Expectations approach to investor relations, changes in, xvi 205–210 difficulty exceeding, 272–278 approach to portfolio manage- gap, 25, 143, 176–177, 282–283 ment, 96–101 hypothesis, 126 correlation with shareholder internal and external expectations, returns, 337 209 EBM-based incentive compensa- maps, 209 tion system, 84 reconciling corporate and EBM system, 21–23 operating, 86–87 focus on long-term, 25–26 treadmill, 180–181, 335 for strategy, 250–252 who sets expectations, 334 bindex_copeland.qxd 7/19/05 4:18 PM Page 354

354 Index

Expected spot rate, 126, Graham, Harvey, and Rajgopal, 202, spot rate, 127 347 Expense padding, 83 Greenfield capital expense, 91 External communication, 34, 182, Grouping data in statistical analysis, 192, 202, 223–224, 336 293–294 process, 208 Growth to analysts and investors, 34 earnings (bottom-line) growth, 7, 333 F long-term earnings growth Family-owned business, 266 (changes in expectations Fannie Mae, 330–331 about), 32, 45–46 Feedback, 249 profitable growth, 7 Financial Accounting Standards sales revenue (top-line) growth, Board (FASB), 312 6 FASB 142, 313 top- and bottom-line growth, the Finnerty, 184, 347 combined objective, 9 Firm size and survival, 272 Grullon and Michaely, 187, 347 Forbes compensation database, Guay and Harford, 187, 347 227 Forecasting, 79–80 H predicting future spot prices of Harris, Roenfeldt and Cooley, 285 , 279–280 Hasbro, 148 Forward rate, 126–127 Hockey stick forecasts, 83, 225, 281 Forward-looking metrics, 94 HOLT Value Associates, 287 Free cash flows, 9 Home Depot, 166–177 Hughes, 260 G Hurdle rates, 59, 60, 61 Gates, Bill, 194–195 for baseline capital expenditures, 60 GDP deflator, 300 for new (unexpected) capital General Mills, 155 expenditures, 61, 91 General Motors, 317 Geometric average, 126 I Gillette, 198–201 Implementing for impact, 340 Givoly and Palmon, 184, 347 Incentive design, 213–241, 276 Glamour stocks, 164 Incentives aligned with GlaxoSmithKline, 231–233 performance, xviii Goodwill, 234–235 Incentives and middle Impairment charges, 313–316 management, 235–238 Goodyear, 148 Industry-consolidating combination, Gordon, xxi, 343 106 bindex_copeland.qxd 7/19/05 4:18 PM Page 355

Index 355

Inflation, 295–301 Kilts, Jim, 201 effect on Kodak, 148, 251 requirements, 299 Koller, Tim, xxi impact on financial ratios and , 297, L -related distortions, 296 Lakonishok and Vermaelen, 285, rate, 199 349 Information, market equilibrium for, Lay, Ken, 197 310 Liquidation, 106–107 Inside information, 179, 184–185 Liquidity, 130 Intel, 3, 15 Longer-range budget, 121 Internal communication, 224, 336 Loughran and Vijh, 189, 347 Internal (IRR), 58 Lowe’s, 166–177 Inventory write-downs, 153 Luo, 207, 347 Invested capital, 260 strategy, 35 M Investor relations officer, 208 Macroeconomics, 331–332 Investor relations, 179–211 Madden, Bartley J., 287, 289, 296 as marketing challenge, 203–204 Maintenance investments and external communications process, acquisitions, 335 208–210 Malkiel, xxi, 343 principles of an EBM approach to, Management report, 249, 254 205–206 Marginal statutory tax rate, 125 role of investor relations officer, 208 Market discount rate, 290 two-way dialog, 207–208 Market portfolio, 132 Market value added (MVA), 292 J Market-adjusted return to Jaffe, 184, 347 shareholders (MAR), 19, 37–39, Jaganathan, Stephans and Weisbach, 293 187, 347 Market-to-book ratio, 19 Jegadeesh, Kim, Krisehe, and Lee, Market risk premium, 132–133 164, 346 trend, 134 Jennings and Mazzeo, 207, 347 Marshall, Sir Alfred, xiii, xxi Johnson & Johnson, 232–233 Masulis, 185 Joint venture, 91 Matsumoto, Dawn, 194 McNichols, Maureen, 205 K McTaggert, xxi Kaplan, Robert, 287, 303–305 Medoff and Abraham, 235–236, 348 Karolyi, 191 Merck, 232–233 Kau, Link and Rubin, 207, 347 Meredith, David, 221 bindex_copeland.qxd 7/19/05 4:18 PM Page 356

356 Index

Mergers and acquisitions (M&A), 74 Operating margin, 259, 265 planning, 102–104 Operating value drivers, 80, 245 Merton, Robert, 316 Operating/investing flexibility, 143 Microsoft, 194–195 Option value, 59 Miller and Modigliani, xxi, 142, 284, Outsource, 264 343, 349 Overinvestment challenge, 20, 70, Miller, 190, 348 89 Mission statement, 252 Bethlehem Steel Company and, Mitchell, Lewin, and Lawler, 239, 348 71 Monitor Group, 287 Mortality, corporate, 272–273 P Motorola, 148 Partial IPO, 107 Murdock, David, xi–xiii Pattern recognition, 340 Murrin, Jack, xxi Pay-at-risk, xviii, 227–230 Payback, 58 N Pay-for-performance, 215, 276 Net cash receipts (NCRs), 289, 290 Pension Benefit Guaranty Corp (NPV), 58 (PBGC), 330 assumes no flexibility, 59 Performance New capital projects, 94 absolute, 230 New investment, 91–96 business unit, 34 New Zealand Telecom, 281 company-specific, 39 Net operating margin, 264 empirical relationship between Nike, 148 total return to shareholders Nobel, Carl, xxi, 287 and measures of performance, Noise, 26, 48–51, 179, 183, 189–192, 31–32 202, 309, 311 measurement, 3 indicators, 200 research on measures of reducing, 191–192 performance, 32–34 stylized facts about, 190–191 Perpetuity, present value of, 92 Nominal and real cash flows, Pettit, 285, 349 297–300 Pfizer, 231, 233 NOPLAT margin, 298, Phantom stock, 217–218 Adjusted real NOPLAT margin, Planned capital spending, 147–148 298 Planning and budgeting, 82–88 Norton, David, 287, 303–305 Polaroid, 251 Portfolio analysis, 96–102 O Postmortem, 153 Objective function of a company, 4 Potential investors, 266, 283 One-period performance measures, 14 Pre-Z companies, 293–294 bindex_copeland.qxd 7/19/05 4:18 PM Page 357

Index 357

Price-to-book tips for reverse engineering stock analysis, 96–99 price, 178 ratio, 98 Risk-free rate, 126 Principal-agent problem, 213–215 Risk-adjusted return, 273 Proctor and Gamble, 201 Risk differential, 291 Productivity and incentives for Ross, Stephen, 224 hourly workers, 239–241 Royal Dutch Shell, 104 Promised yields, 128 Public policy, 309–332 S Purchasing power, 297 Safety chains, 156 Salomon Smith Barney, 200 R Sarbanes-Oxley, 223, 320–322 R-squared, 292 Schering Plough, 232, 233 Ralston Purina, 275–277 Securities research, 328–329 Rappaport and Mauboissin, 163, 346 Sell-side analyst, 164, 190 Rappaport, Al, xxi, 202–203, 208, 287 sell-side research, 328–329 Rational expectations, 181 Senior management compensation, Real cash flows, 297 214 Real options 26–27, 111–121, 226 Sensitivity analyses, 254 and budgets, 120–121 Symptoms of an Out-of-Control and strategic planning, 117–120 Capital Budgeting System, 149 near-the-money real options, Share of wallet, 244 114 Share ownership, 219 Real rate, 290 Shareholders’ wealth, 94 Reentry, 107 Signal-to-noise ratio, 34, 48–49, Regulation FD, 312, 319–320, 328 182–183 Relationship between performance Signals, 183, 185–188 and stock price, xvii capital structure changes, 188 Repurchase shares, 185, 275 dividend payout, 187–188 Residual Income, 57, 92–95, 290 open market repurchases, 187–188 Restructuring opportunities, 107 tender offers, 185–187 Retail bank, 245 Skilling, Jeff, 197 Return on equity, 244 Skin in the game, 78, 216, 219–220 Return on invested capital (ROIC), Small companies, 266 11, 173, 259 Span of control, 238 timing or pattern of, 71–73 Spin-off, 107 tree, 259, 283 Spread between ROIC and WACC, Revenue growth, 173 13 Reverse engineer value, xviii, Spurious correlation, 39, 41 163–178, 334 Stern Stewart, 287, 302 bindex_copeland.qxd 7/19/05 4:18 PM Page 358

358 Index

Stern, Joel, xxi Unexpected new investment, 47 Stewart, Bennett, xxi, 293 Stock options, 218–219 V expensing, 316–317 Valuation of firm, equivalent ways Strategy, 252 to, 57 Strategic planning, 117 Value drivers, 21–23, 80–82, feedback loop, 118 173–175, 254, 259, 265, 282 Stretch targets, 78, 335 at Home Depot, 174 unreasonable objectives, 274–275 at Lowe’s, 175 Sunglass Hut, 109 identification, 82 Sustainable competitive advantage, tradeoffs between, 240 252 Value Line Investor Survey, 165 Sustained value creation, 340 Value realization, 100–101 Value Reporting, 204 T Value veneering, 243 Terminal value, 170 Value-based management systems, Total compensation, 227 23, 287–308 expected total compensation, 228 recommended attributes, 288 Total Return to Shareholders (TRS), Vermaelen, 185, 348 1, 37 Vesting schedules, 219, 224 Reasonable TRS targets, 275–278 Tracking analysts, 207 W Tradeoffs between - and Wall Street Insight, 279–283 long-term performance, 334 Waste Management, 109 Training program, 249 Weighted average cost of capital Treasury strip, 126 (WACC ), 60, 123–144 t-test, 42 at business unit level, 140 Tuchman, Barbara, The March difference between the actual and of Folly, 4 expected cost of capital, 47 Tufano, Peter, 226 expected cost of capital in the Two hurdle rates, xvii future, 123, 125 Two-way dialogue, 207 Wesco, 159 Westinghouse, 230 U Whisper numbers, 199 Underinvestment challenge, 20, 69, 89 Y Unexpected market returns, 37 Yield curve, 126 bindex_copeland.qxd 7/19/05 4:18 PM Page 359 bindex_copeland.qxd 7/19/05 4:18 PM Page 360 bindex_copeland.qxd 7/19/05 4:18 PM Page 361 bindex_copeland.qxd 7/19/05 4:18 PM Page 362