Department of Economics



Corporate Governance is a subject of many professional and academic debates. Since there are many different research and contexts associated with corporate governance problem, then, this topic has continued to be an interesting topic under scrutiny. However, is has been observed that the relationship between corporate governance and value creation of corporation remains as an untapped area with enough consideration. This paper tends to investigate this linkage and using Enron case as critical analysis.


1. Introduction.................................................................................5

2. Literature Review..........................................................................6

3. Corporate governance and performance of the company ...........................8

3.1. Definition and explanation of key concepts ..........................................8

3.1.1. The concept of corporate governance............................................8

3.2.2. The concept of value creation...................................................12 Definition of value creation.......................................12 The importance of value creation.................................13 Measuring Value-creation..........................................15

3.2. The impact of corporate governance in the Value Creation..........................17

4. The role of finance in creating value ..................................................21

4.1. The principles of management by the financial value...............................21

4.1.1. The principle of double market.............................................21

4.1.2. The principle of identifying financial levers..............................22

4.1.3. The principle of internal steering...........................................22

4.2. The mechanisms and the extent of creating value....................................23

4.2.1. The economic indicators.....................................................23

4.2.2. The indicators such as accounting..........................................24

4.2.3. The nature of stock market indicators......................................25

4.3. The limits of management by the financial value ....................................26
4.3.1. Scope limited and performance standards unrealistic....................26

4.3.2. Transfer of risk to the employee shareholder..............................27

4.3.3. Focus on short-term and limits the cost of capital........................27

5. Critical approach to corporate governance: the case of Enron........................29

5.1. Introduction of the Enron affair.............................................29

5.2. Enron's scandal...............................................................32

The consequences of this scandal...........................................34

The lesson from Enron Case................................................36

6. Conclusion.................................................................................37

7. Further study recommendation.......................................................38


List of Abbreviations


Non- Governmental Organization


United State


Chief Executive Officer


Board of Directors


Chief Operating Officer


Chief Financial Officer


Chief Risk Officer


Cash Flow Return on Investment


Economic Value Added


Residual Cash Flow


Discounted Cash Flow


Cash Value Added


The Rainforest Action Network


Management by the Financial Value


Total Shareholder Return


Market Value Added


Net Present Value


Earnings per Share


Return on Equity


Economic Rate of Return


Price to Book Ratio


The successive industrial revolutions of the late eighteenth and nineteenth century were a major factor for the development of Western capitalism and gave gradually traits that characterize it today. In this movement, the company as a structure that brings together human beings who are organized to act on nature to obtain useful results and thus create value has always been at the heart of the capitalist system.
However, in recent decades, many changes have affected the financial-market capitalism and gave new prominence to creating value for shareholders of the company. This has resulted in the emergence of a form of management oriented to advance the financial value and mobilize employees to that goal. This focus on value creation reflects a desire to meet the requirements of the shareholder because it has become in the current financial world a king increasingly adulated and increasingly capricious. Undoubtedly, this logic has largely influenced the conduct of the strategy of companies that demonstrate ingenuity to cope with competition and remain competitive.
However, it has undergone profound questioned at a number of scandals that have marked with an indelible history of finance and have been accompanied by strengthening institutional mechanisms for regulation of businesses and financial markets.

In such a context of questioning, suspicion and doubt in respect of managerial practices, questions about the role of governance and firm's value creation - does it not absolute importance to apprehend the changes that occurring within the company? The aim of this paper is to answer this question.

The structure of the paper is organized as follows. Section 1 provides a background of what has been done in the literature in the effort to capture relationship between corporate governance and value creation. Section 2 introduces the key concepts such as corporate governance and value creation. Section 3 illustrates the role of finance in creating value in firms. Empirical approach are presented and discussed in section 4, with special stress on the managerial behaviour in Enron's Company. Section 5 will conclude and propose further areas of research.

2. Literature review

On the topic of relationship between corporate governance and value creation, there have been various researches and conclusions.

Before examining about the relationship between corporate governance and value creation, many early studies has explored the linkage between Ownership and Value Creation as a beginning. Talking about owners who have been passionate about their ideas and visions to create the best value for their company, study named Ownership and Value creation of Carlsson.R.H (2001) gave a valuable historical review and illustration with case how active ownership has played an important role in company development. Through this book, we can see that ownership makes significant differences in corporate governance, it fulfils an indispensable role in the market and its quality made firm the best value.

Later, in his research Corporate Governance and Value Creation, Jean-Paul Page (2005) has referred to the financial approach to corporate governance in his analysis. He has explored the connection between the foundation of power and decision making to create the large value for firms. In order to focus on an in-depth analysis of the links between value creation and governance, his research started with the assumption that regulation and laws exist to constrain corporate activities which could harm society as well as the economy, then corporate agreement is expected. Through a research, he tried to find the answers of who should hold the ultimate power which companies can create maximum value or how this power should be used. To do this, first, he discussed the delegation of shareholder power and a variety of standard to evaluate the performance of managers. Then, he presented a framework by which securities analysts can evaluate corporate governance system. As the result of his study, he strongly believed that directors of companies have the necessary judgment to discharge their value creation responsibility. Jean-Paul Page result is developed further in detail by Monks (2002) when he applied this theory into Volkswagen Company.

After that, Huse (2007) successfully combines the behavioural of director's work and the value creation which contributes to both the practitioner and the academic debate. Huse's book is based on two key ideas: the main task of a broad of director is to create value for company and looking inside board to understand the value creation process needs. His book provided a good discussion about governance effectiveness and value creation by an exploration of behavioural perspectives on governance and how various types of related factors influence governance as well as value creation.

In addition, in his recent research named The Value Broad: Corporate governance and organizational behaviour in 2008, he aimed to go further and explore actual behaviour in creating value from entrepreneurial management perception throughout various European countries such as Netherlands, Italy.

Beside, The differentiated Network: Organizing Multinational Corporation for value creation of Nohria.N and Ghoshal.S (1997) was successful to present the globally distributed capabilities of multinational corporations and organize these corporations for value creation. This study is built to develop these ideas of both authors above.

Besides theoretical research and studies, many case studies were analysed to examine the implication of all theories in the real economic market. Case study in Finances: Managing for Corporate Value Creation of Bruner.R.F (1990) provided numerous financial analyses of the world famous and successful corporations such as Walt Disney, Atlantic Southeast Airlines, Morgan Stanley Group INC, Merit Marine Corporation...However, this analysis was published in 1990, it can not update with changes in the economy as well as financial scandals have been happened through recent years.

Based on all these suggestions, an analysis of value creation and the role of corporate governance is an interesting paper. And Enron's scandal in 2001 is an updated illustration.

3. Corporate governance and performance of the company

3.1. Definition and explanation of key concepts
3.1.1. The concept of corporate governance

We can consider that the practices of corporate governance have ancient origins insofar as they are inseparable from the very concept of enterprise. Indeed, corporate governance problem was already in the eighteenth century. Adam Smith posed as soon as 1776, in the Wealth of Nations, the problem of separation of interests between managers and owners in companies per share. This question will take a new turn with the emergence in 1807 in France and then England with the Company Act and a little later the United States, the limited liability company.
In general, governance refers to the governing relations between the leaders of a company - more broadly, an organization - and the parties concerned by the fate of the so-called organization, mainly those who hold "legitimate rights "- namely shareholders. Even if made generally and in order to illuminate our analysis, such a definition requires clarification.
First, governance is focused on a category of actors of any organization: the leaders of this organization, category sometimes reduced to a person, most often represented by a small group strongly hierarchical around the leader, sometimes expressed by semi-hierarchical and ill-defined contours. Whatever the difficulties of defining exactly and narrow, this category of actors always pay attention on a system of governance. Corporate governance can be seen as vast field and its works as regulatory body that includes (OECD, 2004):

Chief Executive Officer (CEO)

Board of Directors (BOD)

Management of Organization


Stakeholders (Suppliers, Employees, Creditors, Clients and Social Communities)

Then, the issue of governance is also the role and control of corporate officers in legal persons. The leaders of an organization finalized - commercial, public ... Speak and act on behalf of this organization: a title that they can buy, sells, hire, dismiss and so on. They have before it the financial, material, human, which can be considerable even excessive. Issues relating to their appointment as corporate officers, the conditions for exercising their mandates are, therefore, legitimate and make corporate governance a key point of management systems of the latter.

Finally, the governance system includes various components that can be, simplifying, grouped into three sets of components: structures, procedures and behaviour.

The structures involved in the governance system are varied. Some are specific to the organization concerned: general meeting, board of directors, ad hoc committees. Others are external and intervene on the basis of contractual missions (auditors, rating agencies) or as part of missions of general interest (regulatory authorities).

The procedures are also very varied and more or less diversified in codes or codes imposed on the actors involved (chart of accounts, commercial code ...). They may involve both methods of collection and dissemination of information on the functioning of the entities concerned that ways and means to carry out such an operation such as changing the parameters of the structure or listing on the financial market.

The behaviour complements the first two components by providing a dimension without which they would remain for the most formal. Such behaviour are those agents - individuals is not the legal fiction made up by legal persons - involved in the institutional and responsible to implement it and animate it. Therefore, their "best practices", their ethics or, conversely, their lack of scruples and their departures were a major part in the effectiveness of governance systems like any human system.

In their brilliant literature review of corporate governance topic, Shleifer and Vishny (1997) offered a definition of corporate governance: Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment (p. 737).

This notion of governance seems rather simplistic. Because it is limited to the individual control worked out by shareholders and ignores the rights of all the other stakeholders in the company such as creditors, suppliers, customers, employees, and finally, the State and society in general. Indeed, the shareholder affects some form of power and imposes limits in varying degrees that affect value creation. Besides, this definition of governance fails to take into account the implicit rules and standard such as legislation, regulations and contracts. All these things actually have an important influence on final decision.

In his book, Jean- Paul also gave the broad definition of corporate governance as follows:

Corporate governance consists of the legal, contractual, and implicit frameworks that define the exercise of power within a company, that influence decision making, that allow the stakeholders to assume their responsibilities, and that ensure that their rights and privileges are respected. (pp.2)

To be successful in this notion, corporations must acquire the best resources such as: finance, material and human at the best if they want to create value or wealth.

Good corporate governance is assessed in a book named Corporate Governance: Responsibilities, Risk and Remuneration, Keasey. K and Wright. M (1997) He defined a good corporate governance is as concerned with correctly motivating managerial behaviour towards improving the business, as directly controlling the behaviour of managers. They also analysed executive remuneration is one mean of motivating good behaviour.

Illustrating the standard corporate governance frame work, both authors above indicated that the key elements concern the enhancement of corporate governance is via supervisors of management performance and ensuring the accountability of management to shareholder and other stakeholders. They displayed it as a figure below:

Supervision of directors

Analysis of a frame work of corporate governance was also carried by Hart (1995). He discussed the need for accountability and supervisor of director come up because there is a divorce between ownership and control power in large firms. According Hart's study, supervision may take various forms ranging form system where shareholders are outsiders with little direct incentive to monitor management.

Moreover, Whittington (1993) argued that is has to be noted that the accountability and supervision aspects take place within a wider regulatory framework which regulates relationship with external third party contractors.

In 2005, McGee described a summarized version of a company and its different environments in which it operates as a picture below:

3.1.2. The concept of value creation Definition of Value Creation

As for value creation, it is an ambiguous concept because of the multiplicity of managerial practices associated with it: exchange value, book value or economic value partnership, value for the customer, and so on.

In all case, the most important objective of every firm is to maximize resource allocation, to produce as much economic value as much as possible and to look up social well-being. Offering the best product and services at reasonable price is the way which firms can do to achieve these objective above.

Jean-Paul Page (2005) examined economic value as creating wealth. Because the firm's wealth is measured by the value of their product on the market, then, creating value for firm mean company will observe its prices and value increase as demand for its services and goods rises.

Concisely, creating economic value means increasing in firm's value, increasing in share price and creating wealth.

As a result, corporate governance have to focus on decision that tend to maximize share price and then on the creation of economic value. This way will translate the wealth creation objective of firms into tangible results. The importance of value creation

In his academic journal, Favaro.Khas proved that if firm puts their value creation as a first strategy, it will help a corporation growth in the greatest rate.

First of all, by understanding how, why, where the value is created within your company; which is the market where your company perform best; identifying which of your company's activity and asset is distinctive enough to be a profitable growth will tell your company where and how to grow. The best example of this case, we have to mention about Coca -cola. Since the early of 1980s, Coca-cola's leader discovered the value creation in their mix businesses and in the entire beverage system; then, this company have taken a major growth opportunity in their core business.

Secondly, there are two advantages which putting value creation first can gives firms are: capital and talent. When firm set value creation first, they will never suffer from a capital shortage. Favaro gave explanation that, these companies which put value creation first will find sufficient capital for their investment needs and can attract a large capital from the market, and then they never miss any investment opportunities.

In addition, knowing all important targets, these companies also understand how important the high standard and good qualification managers are. Therefore, over time, these firms will build a team of manager with better capabilities and standards. This will give company more managerial talent and help these companies achieve higher level of profitable and also sustainable growth than their competitors.

Value creation enhances company's ability to grow up which requires perseverance Discipline and leadership skills. Through his experience, Favaro suggests that:

By product, channel, customer, market and technology; skilled managers who always put value creation first will understand how or why value is created or destroyed. Then, they will know whatever cut will be the best reveal the truly capabilities or asset which their company have to do to get profitable and growth.

Promoting, celebrating and rewarding managers who see growth is an outcome of their focus on value creation.

Briefly, if a company put value creation first in the right way, their managers can identify how and where to grow, they will use capital better than others and build up more talents. Consequently, value creation will offer you a vast advantage to achieve profitable and long-term growth.

It should be noted that these multiple approaches are experiencing varying degrees of success. Thus, while some of them are rather a fashion effect, others seem more rooted in the reality of management. This is particularly the case in the field of strategy with the general themes related to the competitive advantage that determines the value that a company can create for its customers and in the field of finance with the concept of maximizing the shareholder value.

However, there are two themes refer to distinct managerial logic. In schematising, one can oppose a logic of financial reform dominated the creation of financial value and logic of integration that connects the various aspects of value creation.

The financial approach emphasizes the idea that any asset is comparable, at least conceptually, a financial asset whose correct measure is the present value of expected flows of that asset, given the risk that it is linked. Thus, by analogy with financial assets, it is possible to buy or sell at any time comparable assets or reinvest the funds on other opportunities. The option is part of choice and is a factor of flexibility.
The logic of integration recognizes the importance of value creation but the analysis as the result of a synthesis of different components of value, whether organizational aspects, competitive or institutional. It puts forward concepts such as basic skills, know-how of cooperation and coordination, competitive advantage. It requires a broader view of performance and the development of a scoreboard, including non-financial aspects.

This concept of value creation is currently experiencing a revival and for several reasons. This renewal first undoubtedly result of the transformation of financial capitalism and its origin movements takeover carried out on companies that exploitation not effectively their asset base for shareholders. These practices have provided external visibility to "market discipline" that has prompted leaders to do more attention to creating value and bring back the shareholder at the centre of the strategy.

In addition, development of globalization and the rise of new technologies of information and communication technologies have accelerated the process of internationalization of enterprises and networking complex and globalize. The result is a financial reform of the strategy based on the refocusing on the principal market and the pursuit of critical size. That is why the purchase of shares and options markets external growth is systematically privileged at the expense of endogenous development of the company. But for institutional investors, who control more companies using their power, the ability of business to create value is an essential criterion of assessment. Finally, another external factor that has boosted the value creation is the gradual disappearance of state monopolies especially in the case of France. The purpose of the public monopoly system based on the existence of cross-shareholdings is to ensure a stable partnership. The financial globalization has gradually reduced the interest of a national shareholding making less essential closures capital that provides few resources. Measuring Value-creation:

When evaluating value creation, there are three main measurements are: Cash Flow Return on Investment (CFROI), Economic Value Added (EVA), and Residual Cash Flow (RCF).

G. Bennett Stewart III (1991). The Quest for Value. HarperCollins discussed Economic Value Added (EVA) as the heart and soul of Value planning. He described EVA is the one measure which properly accounts for all the complex trade-offs involved in creating value. EVA computed by taking the spread between the rate of return on capital r and the cost of capital c* and then multiplying by the economic book value of the capital committed to the business:

EVA = (r-c*) x Capital

EVA = (rate of return - cost of capital) x capital

EVA will increase when:

The rate of return earned on the existing base of capital improves; that is, more operating profits are generated without tying up more funds in the business.

Additional capital is invested in projects that return more the cost of obtaining the new capital

Capital is liquidated from, or further investment is curtailed in, substandard operations when inadequate return being earned.

These are the only way in which value can be created, and EVA captures them all. One calculated, EVA as seen as an indicator of how much value was created. If EVA is positive, value was added. In contrast, if EVA was negative, value was lost. It all depends on the governance of a corporation.

The second measurement is Cash Flow Return on Investment (CFROI) was marked by Bartley J. Madden (1999). CFROI valuation: a total system approach to valuing the firm. He has shown that CFROI is rooted in discounted cash flows (DCF): more cash is preferred to less, cash has a time value and less uncertainty is better. Besides, applying DCF, the CFROI illuminate variables ignored in many valuation models. The CFROI valuation model incorporates managerial skill and competition in the form of a competitive life-cycle framework for analyzing firms past performance and forecasting future performance. In equation, we have:

CFROI = Inflation Adjusted Cash Flow

Inflation adjusted Investment

Under CFROI, economic is measured and calculated by:

Classifying cash outflow and inflow over the life-cycle of assets

Amending both cash out flow and inflow into unit which suitable to constant purchasing power.

Calculating the CFROI similar to Internal Rate of return.

Rahul Dhumale (2003) with Excess cash flow: a signal for institutional and corporate governance has introduced about Residual Cash Flow (RCF). He defined RCF or Cash Value Added (CVA) is net cash flow minus a charge for cost of capital.

RCF = Adjusted operating Cash Flows - Cost of Capital

In his book, Dhumale pointed out some drawbacks of RCF, but they are just few such as RCF is not a comparable type of measurement between companies and it is sometimes more appropriate for project evaluation rather than company valuation.

3.2. The impact of corporate governance in the Value Creation
There is now a general consensus on the idea that governance plays a crucial role in creating value. The areas on which governance can act to create value are many and varied and there can be no question to consider exhaustively. To discuss about the impact of corporate governance on value creation, a close examination on the impact on its internal operations were carried out by Tan.W.L

Strategic direction in long term. Corporate governance always requires the strict selection of the board of managers which help firm identify exactly what are the targets they want. If the selected managers do not have right attitude who have less strategic long-term initiatives will affect the firm's strategic direction.

Transparency issues: Corporate governance and transparency issues have a strong connection. The guidelines require the corporate disclosure about the manager's activities. That is a reason why there is always high demand for an internal audit and an audit committee in all firms. As a result, there is also a spate of management frauds which lure the regulators who responsible to institute or peer into areas the abuse could occur. In case of value creation, the link between the actual results and the intended results would be tenuous, leading to the over passionate auditors to rein in value creation activities.

Beside, I can limit to consider three points: the building of trust, respect the interests of stakeholders, taking into account the social responsibility as others impacts of corporate governance on value creation.

The establishment of confidence
The establishment or restoration of the confidence of shareholders has become a necessary condition for the operation and even for corporate survival. Indeed, a series of scandals recently punctuated the business world. Capitalism has been transformed so that managers often enrich themselves at the expense of shareholders.
In this sense, the adoption of standards and financial laws guaranteeing greater transparency in accounting and management and due diligence of boards in terms of accountability can restore confidence to investors.
Thus, the law Sarbanes - Oxley Act passed by U.S. Congress in July 2002 adopted three principles: accuracy and accessibility to information, managerial accountability and independence of auditors. The law thus increases dramatically transparency modes of governance for ensuring accountability much more detailed to investors.

Similarly, institutional communication online can be a significant means at the service of governance to establish or restore confidence and create the value. It also notes that large companies have all now have a website and compete more and more by the quality of their institutional website. It is today the first reflex of shareholders, journalists, financial analysts and consumers is to visit the website of the company to find information, any information concerning it.

But to create or maintain the confidence of investors, boards of directors are also making efforts to compress wages often very high social leaders. In this sense, during the period of general meetings of shareholders, we note that in recent years of resolutions aimed at compressing the salaries of CEO are more taken. Tackling this element is, however, that address one aspect of the problem of performance pay.
To truly do so, they have a duty to determine the responsibility of the CEO and establish parameters for evaluating the performance of the latter and that of the company and the link between pay and performance. By the way, the emphasis is beginning to be placed on the fee. Similarly, to ensure the long-term interests of shareholders, it provides administrators temporarily transferred shares or units of action delayed. The actions temporarily transferred are actions which can not be sold by administrators after their departure from the board. This eliminates the possibility to take decisions or make recommendations based on their short-term interests.
As the deferred share units, it is not, strictly speaking, actions, but their value is linked to that of an action listed. Again, administrators affect the value of units deferred action when they cease to serve on the board.

Respect the interests of stakeholders
With respect to the interests of stakeholders; we note that social responsibility is one of the newspapers since the financial scandals of recent years. As most of these have resulted in the plummeting value of the securities, attention focuses on the need for greater accountability of the company to shareholders. Agencies such as stock exchanges, securities commissions and the accounting profession have concentrated their efforts on restoring confidence in the financial information system, the integrity of the company and stock markets. We are witnessing a mutation, however, longer-term corporate accountability. The collapse of Enron, globalization, information dissemination and pressing environmental challenges such as climate change transform our conception of the role of business in society. Thus, the corporate law currently in force in most companies give priority to the interests of shareholders, who did not summarize the maximization of profits, and it also protects the abusive practices of leaders.
By the way, the New York Stock Exchange has introduced the Dow Jones focused on sustainability (Dow Jones Sustainability Index), accessible to investors and that follows the performance of companies worldwide fulfilling its criteria. The Dow Jones analyses show that companies listed on the index focuses on sustainability are leaders in terms of performance. In its annual review of the index for 2000, Dow Jones said that the sustainability of interest to investors because it is a business strategy that creates long-term value for shareholders by seizing opportunities and managing risks associated with economic, environmental and social

Taking into account the social responsibility
As far as taking into account the corporate social responsibility, it is certainly a new field but promising. Indeed, the movement of social responsibility which is part of a broader trend towards sustainable development, now pushing companies to play a pioneering role of respect, but also the creation or processing of ethical values.
Concretely, this means that the company has become, in the field of ethics, more attentive to the concerns of its stakeholders, including civil society, including NGOs and the media are the voice.
To understand the link between corporate social responsibility and governance, take the case Home Depot, a North American company. In 1998, the largest retailer of lumber in the world was on the hot seat. The Rainforest Action Network (RAN), an organization dedicated to protecting the environment, accused Home Depot to do business with suppliers whose practices logging of old growth forests destroyed, according to the allegations. Under a highly publicized campaign, RAN described Home Depot's largest retailer of lumber from forests mature stand of the world, and has organized demonstrations in front of Home Depot stores, the company's headquarters and at meetings of shareholders.
To avoid tainted his reputation, Home Depot has responded. In the 10 months that followed, the retailer announced a plan to phase out the sale of timber from endangered forests. He created an executive position whose holder is responsible for environmental issues and has the power to cancel the logging contracts with suppliers not environmentally friendly.
Returning to the present, Home Depot now has systems that allow it to trace the origin of each wood product it sells. The company undertakes public not to buy wood products not certified from 10 forest regions vulnerable, and not to accept products made from 40 tree species threatened with extinction. RAN has publicly acknowledged the actions "impressive" taken by Home Depot, and a substantive article published in The Wall Street Journal has presented the company as a model in the art of managing risks arising from requirements imposed by lobbyist's militants.
One could multiply examples citing the case of Nike and Nestlé who have experienced the same situation in the past. Thus, we see that companies, anxious to heal its reputation, eventually strengthen their value and image of their products in the eyes of the public by acting ethically.

4. The role of finance in creating value

When we look at the financial function within a company, we will find the main activity is accounting such as: payroll administration, processing of payroll, or financial report... According to a survey of The Financial Times journal, there is over 70% of all financial management are spent on the processing of accounting transaction. Risk management, strategic planning, investment analysis and forecasting which called real financial management, therefore, count less then 20% of financial management. In this section first begins by the principles of management by the financial value and then go on to the mechanisms and the extent of creating value. In the last part in this section, I'll analyst some limitations of management by the financial value.

4.1. The principles of management by the financial value
The management by the financial value follows a number of principles including the principle of dual market, the principle of identifying key financial levers, and the principle of internal steering I will be discussing succession.
4.1.1. The principle of double market

As a first step, we need an overall financial strategy based on the principle of double market. Indeed, the main issue model of creating value is strategic: to establish internal elements of steering the financial value of so-called value based management. According to academic journals, there are 2 definitions of value based management. The first one define value based management is the management approach that ensures corporations are run consistently on value normally maximizing shareholder value. While, another says: Value based Management aims to provide consistency of the corporate mission, strategy, culture, decision process and system, performance management processes with the corporate purpose and values which a corporation wants to achieve Then, the management by the financial value (MFV) appears as the common denominator of the strategic and financial planning, policy acquisition and divestitures, and policy incentives.
Thus, officers and employees will be encouraged to maximize value from mechanisms premiums or bonus related to the enrichment of shareholders. More important than the final result, this step can identify the strengths and weaknesses of various activities of the company. The concept of MFV based on the idea that a company must succeed on both the market for goods and services and on the financial market. This implies an economic strategy aimed at positioning the company products on the market and a financial strategy to maximize shareholder value. Therefore, ignoring one of the two markets will have consequences on other market because the shareholder is the client of the firm on the financial market as the consumer is a client on the market products.

4.1.2. The principle of identifying financial levers
In a second step, it is necessary to identify key strategic levers of value creation. The first task of MFV is to identify levers of value creation to be implemented by the leaders. I can distinguish four: the streamlining of costs to increase productivity, focus on strategic growth opportunities internal and external value-creating, power up the organization and personnel by flying by the cost of capital and finally is the financial optimisation.
However, that among these indicators values, it seems that only the rationalization of costs to increase their productivity had an impact below the refocusing strategies that involve both internal growth than external growth. There is thus a redeployment of internal growth on the business, customers and distribution channels profitable. At the same time, this shift is often supported by external growth strategies aimed at increasing efficiency (divisions, transfers of activities or participation).

4.1.3. The principle of internal steering
In a third step was to implement the pilot by evaluating and incitement. Indeed, the management by the financial value is not limited to strategic manoeuvres. It is also to disseminate "shareholder pressure" within the organization. The steering performance is evaluated by reference to external performance: the market value. Systems of motivation and incentive staff based on indicators of creating shareholder value are put in place a systematic way. The overall financial objective is defined in terms of cost of capital invested. This objective is then distributed in the structure of the organization. The company is divided into profit centres which are centres of responsibility. Each centre is responsible for its performance defined as the excess of profitability in relation to capital invested in the centre.
In addition, a bonus system is in place to lead the accession of each actor to the objective of creating value and managers are accountable on the basis of financial criteria.

4.2. The mechanisms and the extent of creating value
The various models of creating shareholder value are based on the same theoretical framework, the financial microeconomics. They use a common variable; the cost of capital invested which serves as a benchmark for measuring performance. The assumptions are those of conventional financial models based on rationality actors who are maximizations and opportunistic.
The position taken by the theme of value creation in finance has led to the development of a series of indicators that attempt to measure: Total Shareholder Return (TSR), Market Value Added (MVA), Economic Value Added (EVA). This abundance is not without advantage: competition is healthy and should normally allow the best indicator to emerge. More prosaically, some companies take advantage of current uncertainty and lack of standardization of calculations to choose the indicator that best serves their interests, even change the following year.
These indicators may be of three types: economic, accounting and stock market.

4.2.1. The economic indicators
First, the economic indicators have emerged with the realization that profitability is reached, as such a criterion inadequate in terms of value because it does not take into account the concept of risk. Profitability remains clear to compare the cost of capital employed, i.e. the weighted average cost of capital to measure whether the value was created or destroyed.
Thus, the net present value (NPV) reflects the creation or destruction of value generated by the allocation of resources. A value creation means that investors anticipate the existence of some pension over a certain period of present value allows the economic asset of the company contends that its accounting amount. Like the choice of resource allocation, it is necessary for selecting a source of funding refuse to use the cost accounting, but determining the value of under funding issued and deduct the rate of return required. You pass this cost because of explicit or cost accounting to the financial cost: the rate of return required for this class of securities. Minimize the cost of a source of funding is therefore to minimize its financial cost.

Similarly, the Economic Value Added (EVA) criterion also called economic profit measure the enrichment of the company on an exercise and takes into account not only the cost of debt but also the cost of equity. The innovation of the approach of EVA is to reach a level of achievement from which the value is created because it is calculated after payment of creditors and shareholders on the funds they have made to the business. The economic profit measure primarily what was the economic rate of return in excess of the weighted average cost of capital. This difference is then multiplied by the amount of the asset's economic early period for value creation for the period, either:
Profit economic Assets economic * = (Re - k)

Where Re is the rate of economic return after tax

Accounting k weighted average cost of capital.
Thus, a company that provides early years of an economic asset with a book value of 100, reporting an economic rate of return (after tax) by 12% while the weighted average cost of capital is only 10% will have earned 2% more than the rate required. Of the 100 funds, it will have created value for 2 on the year.

4.2.2. The indicators such as accounting
Then, on indicators such as accounting, note that until mid 1980, the company communicated mainly on net income or earnings per share, leading parameter of accounting but also highly subject to manipulation. But a second generation of indicators accounting became apparent when the reasoning is past in terms of profitability, i.e. efficiency, which reports the results generated capital mobilized to achieve them.
In this sense, we can consider three indicators of value creation: the earnings per share, accounting rate of return and equity per share.
Earnings per share (EPS) remain the favourite of many financial businesses: despite its limitations, this is the criterion most often used today because of the direct link that unites the value of the action the multiple of earnings (PER). The use of earnings per share, however, is based on three misconceptions: that the earnings per share takes into account the cost of capital and therefore the risk, believing that the accounting data affect the value of the company, believing that any financial decision, which tends to grow earnings per share increased value.
In fact, the criterion of accounting can be a useful indicator of value creation only if three conditions are met: the risk of economic asset must be the same from one year to another, or before and after surgery (Fusion, increased capital investment, ...); the growth rate of results must be the same before and after a given transaction, the financial structure of the company must be the same from one year to another Or before and after a given operation.
If these three conditions are met, then we can assimilate EPS growth and value creation. If one of them at least is not met, it is absolutely not possible to compare the BPA and say that the growth reflects a value creation and destruction of a decline value.
The accounting rate of return for their cut the rate of return on equity (ROE), the economic rate of return (EROR) and Cash Flow Return on Investment (CFROI), which in its simplified version reported surplus of 'farm to the economic asset taken on a gross basis.
Only the profitability required by the financial system should be used as the minimum required. Unfortunately, we find that investors and business leaders continue to analyze the impact of their decisions on accounting criteria that we have just seen, even though they have a distant relationship with value creation.
Shareholders' equity per share gives them an image of the heritage of shareholder and could therefore believe that there is a ratio between the value of the share and shareholders' equity (Price to Book Ratio, PBR).
Note however that if the equity accounting is properly evaluated, the PBR is less than 1 if the expected return on equity is lower than the profitability required by shareholders and more than 1 if the return is higher than expected profitability required.
It must be noted that the use of accounting criteria, which in itself is not unhealthy, should not lead to believe that artificially increasing the criterion, it creates value or that there is a constant and automatic report between the improvement of these criteria and value creation.

4.2.3. The nature of stock market indicators
Finally, indicators such as stock market: Market Value Added (MVA) and the Total Shareholder Return (TSR) were strongly influenced by market conditions.
For the listed company, the creation of shareholder value (MVA) is:

Creation of market value = market capitalization + value of net debt - amount

of the asset economy.

However, in most cases, no information is the creation of shareholder value is approximated by the difference between market capitalization and the amount of equity accounting (PBR).
As for the Total Shareholder Return (TSR), it is calculated as the rate of return on shareholder who bought the action at the beginning of the period, affected dividends that the more you suppose reinvested in new shares, and that values at the end of the period its portfolio based on the last course of action. It is in reality a rate of return which the actuarial calculation must be on a fairly long period (5 to 10 years) in order to smooth the impact of erratic stock market fluctuations.
However, and this is their main weakness, these two indicators may show a destruction of value even though the company has reached on its economic asset profitability than the cost of capital. It is for this reason that the former regulatory authority markets (COB) had advocated the establishment of a clear distinction between economic performance indicators and indicators of market value.

4.3. The limits of management by financial value

Despite its many advantages and its increasing role in the managerial system management by the financial value has limits which sometimes call into question its utilisation. Thus, the abandonment of EVA by the group ATT shows that the MVF is a strategic exercise difficult. Needs explaining and references to support your point.

Indeed, in 1992, the firm adopted the EVA and sets up an incentive scheme involving about 1100000 employees. Two years later, two new non-financial measures appear: the added value for customers and value added for staff. In 1997, this system is abandoned in favour of traditional accounting ratios. The measure was too complex to understand for most employees, despite a major training effort.
The limits on financial levers are manifold.

4.3.1. Scope limited and performance standards unrealistic
First, their scope is limited and performance standards often unrealistic. That is why we approach the MVF is not well suited to the banking and financial activities as the amount of capital invested is determined in part by prudential regulation. Similarly, in start-ups (start-up), the flow of revenue estimates are too uncertain to be usable. Finally, the recovery of high technology is not based on optimizing capital employed, but rather on the reaction time or ability to impose a technological innovation, or on the ability to manage options for future development, particularly in information technology.
Moreover, the goals of return on equity of 15% announced by some leaders of large companies under pressure from their institutional shareholders (including pension funds) can not always be achieved and, more importantly, maintained over time.

4.3.2. Transfer of risk to the employee shareholder
Then, the risk borne by the shareholder is often transferred to the employee. The objective of maximizing shareholder value implies a shift in the share of value added for the benefit of shareholders and a reduction in the residual risk they bear. The importance of this move depends on the relative strength between shareholders, directors and employees. The constraints of profitability internalized by managers can lead to first reduce labour costs and employment to reduce the risk borne by the shareholder.
It is within this context that has developed adjustments increasingly rapid employment, a research increased flexibility and variable pay practices.

4.3.3. Focus on short-term and limits the cost of capital
The MVF often focuses on the short term. However, steering the company based solely on maximizing value creation for shareholders could hinder growth and innovation and enhance the short term at the expense of long-term strategic vision. By the way, many studies show that many companies have jointly valued human capital and financial capital. The priority given to improving the return on invested capital has led many companies to focus on profitable lines of business. A company that emerges from its existing rate of return on capital employed high may be tempted to reduce its growth and its lack of investment projects with at least comparable profitability.
Furthermore, the problem of optimization and manipulation indicators of value creation arose very frequently. Indeed, in a group, the issue of leverage of debt and cost of capital is generally handled at headquarters level and is the financial strategy.

However, when the salaries of managers (particularly in the form of bonuses) are linked in part to indicators of value creation, risks of handling these indicators appear as shown by the Enron affair studied latter. These manipulations can involve two elements of the rate of return: apparent increase in the result and artificial reduction of capital employed. The spin or deconsolidation of the accounts of operating assets, securitization of trade receivables, financing specific structures are not consolidated practices that have seen, been widely reported.
Finally, there are limits related to the cost of capital. The cost of capital is a fundamental measure for value creation, but its determination is an exercise that has many limitations. The estimate of this variable has a decisive influence on the measure. However, it is subject to numerous challenges. An underestimation of the cost of capital may result in insufficiently profitable investment and a waste of financial resources. The overstatement may deprive the company opportunities for growth. Moreover, the systematic use of cost of capital leads companies to adjust their internal performance on indicators external volatile determined on financial markets, whose time horizon is usually shorter than that of economic activities.

5. Critical approach to corporate governance: the case of Enron

The scope of governance has undergone in recent years a series of scandals which not only shook the world of finance but also employees and investors who are ultimately the big losers. An ineffective governance, questionable accounting methods or falsification of accounts, payment is excessive and greed of executives have undermined investor confidence and some even wonder if the capitalist system would not be disturbed. To better reflect the crisis of governance, I'll analyze the case of Enron.
5.1. Introduction of the Enron affair
The Texas Company Enron was created the energy sector and has specialized in brokering activity by linking suppliers and seekers. It's developed over several sectors of energy and has grown from a regional dimension to a national scale, then internationally. In 1999, Enron pointing with more than 100 billion dollars turnover stated the seventh largest U.S. companies and became a player in the sector. Beyond its explosive growth, its economic model based on the control of futures markets and derivatives made it a case of success story given as an example the firms of "old economy".

According to Enron annual reports, we can summarize Enron's activities from 1985 until 2001 as in table below:

1985- 1989

1990 -1996



Industrial activity of gas production and transport,

and electricity production

and transmission

Start of business diversification into

energy distribution, raw materials

trading and services

Diversification of businesses into trading in a large number of commodities (gas, electricity, coal, wood, paper, resins, plastics, metals, etc.). Enron launched its electricity

trading businesses in June 1994 and

was to become the largest operator in

this market in the United States

before extending its businesses to

other markets:

Enlargement of its business portfolio to include

other sectors:

November 1999: creation of

Enron Online, the first global raw materials trading site. Enron was one of the

leaders in the development of

electronic marketplaces

- Construction and management of

energy production plants: Dabhol in

1996 in India (a highly controversial


Continuation and acceleration of the

international strategy of diversification into

trading (wholesale energy, retail energy and


Development of the sale of speculative financial


Enlargement of its business portfolio to include

other sectors:

- Acquisitions of telecom networks (sale of

bandwidth capacities to customers such as

Internet Service Provider) and building of an 18, 000 mile fiber-optic network to deliver video

- Water distribution Intensification of the globalisation process

through a large number of direct investments in

foreign countries:

- Acquisition in 1997 of the Sutton Bridge

gas-fired power station in the UK

- Setting up of generation sites in Spain in

1998 to get around barriers to entry

- Development of joint ventures and

subsidiaries in Norway, Italy, Germany,

Belgium, Nigeria, United Arab Emirates and


Enron becomes one of the main players in credit

risks with the launch of instruments for

managing risks in energy markets and other raw

materials markets (hedging of climate risk,

enabling electrical companies to protect

themselves against climatic variations)

Global online trading activity

November 1999: creation of

Enron Online, the first global raw materials trading site. Enron was one of the

leaders in the development of

electronic market places

The system handles

transactions in more than 30


Source: Based on information and data from Enron annual reports,

Datamonitor (2004) and business press

5.2. Enron's scandal

The first crackles occur in October 2001 with a warning about results (profit warning) a sharp decline compared to the forecasts and the first appearance of cash flow difficulties. The events were then rushed: falling prices, investors distrust, degradation notations, on suspicion of handling ... and the bankrupt group. Different surveys have highlighted key aspects of this major disaster on the order of 100 billion dollars of liabilities which may be only partially filled.
First, the turnover had been artificially inflated by taking as a basis contracts concluded or being negotiated, as is usual for a broker, the only commissions received or acquired.
Then, the group had created several thousand companies controlled by the company, either in their personal capacity by executives. This proliferation was similar to several objectives, in addition to prevent a global vision of the group to any observer uninitiated: to move assets between components to create fictitious capital gains, debts by transferring a society to another, relocate profits to evade taxes.
Accordingly, it appeared that the situation presented by the heritage assessment was wrong: the assets were largely overvalued, even fictitious, and in contrast, the liability was undervalued, even hidden.
However, these accounts had been audited and certified by Anderson, world-renowned firm. The investigation has revealed that not only the experts' Anderson had covered the various accounting manipulations, but had contributed to the rise in providing their expertise in the form of advice.
In addition, the community of financial analysts and institutions that employ them have been questioned for less than their blindness because of conflicts of interest in which they were implicated.

The Executive Vice President is crucial responsibility for Enron's bankrupt

Richard Alan Causey was Enron's Executive Vice President and also Enron's Chief Accounting Officer until 2002 when he was fired from Enron as a result of an investigation by the U.S Securities and Exchange Commission. According to Securities and Exchange Commission report, not only Richard Alan Causey, it is also together with other Enron executives and senior managers engaged in a wide-ranging scheme to defraud in violation of the Federal Securities Laws. They manipulated Enron's publicly reported financial results, made false and mislead statement about Enron's business.

After an investigation by US Securities and Exchange Commission, Richard A. Causey and many senior manager of Enron were indicted for many frauds.

First, Causey with other Enron senior managers made false and mislead public representation about Enron's financial report and its unit's performance. They made a reported earning which rose by around 20% every year. With their fake report, investors were persuaded about the light future of Enron's profitability.

Moreover, in case of debts, this report deceived rating agency, investment public and lenders about Enron's obligation and cash flow.

Standing at a high position as an Executive Vice President in Enron Company, Causey was an architect of the plan to control Enron's reports. He participated in key decisions where budget targets were set and what demands were put on each unit in Enron. For a long time, the Causey's scheme inflated the Enron's share price in stock market and keeps the credit score of Enron Company at the successful rate. In 1998, Enron's stock traded in market increased from $30 per share in 1998 to over $80 per share and made Enron become the seventh-ranked company in U.S.

And as an award for their excellent result, at the same time, Causey and many other senior managers were received an increased salary, bonuses. According to a report after the Enron's scandal, Causey made more than $3 million in salary and bonuses at that time. Cause's fraud happened for at least 4 years despite of yearly independent audit by Arthur Anderson accounting firm. Not long after that, one of the world's top five accountancy- Arthur Anderson- went to bankrupt as a guilty for Enron's collapse.

5.3. The consequences of this scandal

The consequences of this scandal are undoubtedly many: thousands of workers become unemployed, investors lose their money, the credibility of the capitalist system is deeply attack ... But the importance failures at both devices corporate governance than devices support - including auditors and financial analysts - raises questions about the regulatory system and consider reforms.
That is why the U.S, the countries most affected, accounting regulations have been questioning on both methods - U.S. Generally Accepted Accounting Principles (GAPP) standards have shown their limits - and the ethical rules. Especially concerning the separation of activities under the inspection of accounts and those within the council to avoid conflicts of interest.
Financial analysts and their employers were also called to order, especially on the other major risk of conflict of interest that is the porosity between the activity of management titles and those under investment operations - financing undertaken by these establishments. Thus, Merrill Lynch, investment banker and managers of securities challenged by the Securities Exchange Commission had to agree to pay 100 million dollars and commit to change its internal organization.
The Security Exchange Committee, the authority dedicated to the regulation of markets and financial transactions was the instrument of these recommendations and has itself been put on the hot seat; its leaders are not free from reproach. By the way, its chairman, Harwey Pitt was taken to submit his resignation in November 2002.
The political authorities were in a comparable situation: on the one hand, the public expects them to take measures copies, as some initiatives and declarations have been able to suggest: creation by Congress of a commission investigating the Enron affair whose report was submitted in July 2002; statements by President Bush. On the other hand, their representatives did not always seem best placed to act, sometimes themselves involved in certain cases.
Finally, the judicial authority in action for liability criminal level is required to intervene in the most significant charged and convicted a number of actors and the setting fines and damages with a significant amount. These procedures, which have been proliferated during the years 2002, will accentuate the trend of courts in society "already very strong in the United States of America.
In this event, the legislature has also reacted strongly with the law Sarbannes - Oxley. That law, enacted in July 2002 is aimed at strengthening control measures and to try to restore a climate of confidence in the accounts of listed companies.
In France, there have been no direct consequences of this case. But indirect consequences there were: strengthening the mechanism for regulating. Indeed, in 2003 was voted the "law on financial security" which covers three aspects of financial life: the strengthening of the supervisory authorities including the creation of the AMF.
(AMF), coaching lobbying trading in financial matters and the strengthening of control professions audit Banning parallel council and creating the High Council of the Commission accounts.
Thus, we find that the concepts of corporate governance and value creation are at the heart of the company and hence financial contemporary capitalism. To this must be added that governance plays a leading role in creating value from several angles although it should be acknowledged that the world of governance and therefore the company has been rocked in recent years by scandals as evidenced by the Enron affair. But what is - the role of finance in creating value? The financial levers have - they suffered a fate similar to that of governance?
That is what we see in our second game.

5.4. Lessons from the Enron Case

There were many reasons led to the bankrupt of Enron and lessons learn from it. Standing in the view of corporate governance, lessons were learned from Enron's case.

First comes by a problem of groupthink and corporate governance's attitude.

Since Enron was performing high in the market, then, Enron's broad had a blind faith in the performance of top managers whatever their top management proposed without searching the trade- off between returns, risks and authenticity of information.

Enron's top managers consisted of people who had strong government background and great industry experience, as well as market experiences; hence, there was also a blind trust in each others decision and judgment. When Enron was at their great rate of development, no one of these managers wants to put a question or check the CEO or the performance of their top managers. That's a reason why for a long time, none of Enron's management can discovered Causey's faults.

The CEO and the Board Chairman should be separate persons. CEO might have aggressive strategies and the Chairman board would have conservative thinking which will work together in the firm interest.

Auditors must have their independent assessment as well as judgments which never allow connive with any agents. Enron's case is not only the expensive lesson for Arthur Andersen; it becomes a page of audit history.

Corporate malpractice is ensured not to set up as precedents by agents. To do this, internal and external stakeholders must be vigilant to make sure that the company is running as a good business citizen. Stakeholder should not be lured by only company's growth rate or stock price in the market; they must pay attention at the wider interest of all concerned.

6. Conclusion
At the end of our study, it should be noted on the one hand that there are links between corporate governance and corporate performance. Thus, governance understood in the sense of pillar based both on the more active role of directors as the ultimate surveillance of shareholders and the meaning of management which monitors shareholder value and active participation in general plays a key role in creating value. In this sense, it may establish or restore investor confidence, participate in defending the interests of stakeholders in the company by strict control of managers. It may also establish or strengthen corporate social responsibility which has an impact on share prices and, as has been seen, has become a major requirement of most investors and NGOs.
However, it is clear that in recent years corporate governance has been questioned unprecedented response to a number of financial scandals that have called into question not only business leaders but also authorities regulating system of governance and political leaders of the first level. These failures of a large scale with all their consequences are at the root of strengthening the mechanism for regulating which was mainly due legislator more than ever anxious to protect the interests of investors and savers.
On the other hand, the role of finance in creating value now appears inevitable. In this perspective, management by the financial value based on fundamental principles such as the principle of double market that wants the company to succeed as much on the market for goods that the financial market, identification of key strategic levers of the value creation and internal steering through incitement and evaluation. And to measure value creation, management uses a number of indicators which may be of economic nature (VAN, EVA ...), accounting (BPA, PER, accounting rate of return ...) or market (MVA, TSR).
However, we must recognize that the management by the value of this financial limits that reduce its scope. In addition to its limited scope bound to focus on the short term, the transfer of risk borne by the shareholder to the employee. The MVF stumbles on determining the cost of capital which is a fundamental for measure value creation.
In the coming years, governance and financial levers remain - the role of the first order they occupy so far in the management of businesses? In other words, will they still key to understanding the dynamics of firms?
It is very likely that everything will depend on the effectiveness of the regulatory system put in place.

7. Further study recommendation

The role of corporate governance in creating value for firms has partly been identified in this research. Nevertheless a quantitative relationship needs to be identified between two concepts. Hence it would be an interested research in the future which encompasses these areas.


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