ECONOMIC ANNALS, Volume LVII, No.

193 / April June 2012

UDC: 3.33 ISSN: 0013-3264
DOI:10.2298/EKA1293093S

Predrag Stani*
Miroslav Todorovi**
Milan upi***

VALUE-BASED MANAGEMENT AND

CORPORATE GOVERNANCE: A STUDY
OF SERBIAN CORPORATIONS
ABSTRACT: The aim of this paper is to
determine the place and role of corporate
governance and performance measures
in the efforts of managers to maximize
shareholder value, and the attitude of
Serbian corporations toward these issues.
The paper first analyses the importance of
corporate governance and performance
measures in the context of value-based
management. Then, through the multiple
case study, we investigate the attitude

of seven Serbian corporations toward

defining the general corporate objective,
corporate governance, and performance
measurement. Finally, we point out the
factors and preconditions that determine
corporate culture, objective definition, and
performance measures used by Serbian
corporations.
KEY WORDS: shareholder value, corporate
governance, performance measures

JEL CLASSIFICATION: L21, L25, G34, G32

Department of Accounting, Auditing and Business Finance, Faculty of Economics, University

of Kragujevac, Serbia, [email protected]
** Department of Accounting and Business Finance, Faculty of Economics, University of
Belgrade, Serbia, [email protected]
*** Department of Accounting, Auditing and Business Finance, Faculty of Economics, University
of Kragujevac, Serbia, [email protected]

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Economic Annals, Volume LVII, No. 193 / April June 2012

1. INTRODUCTION

Companies face the different and often conflicting demands of a number of

stakeholders. This problem is particularly evident when defining the primary
objective of a companys business. Although companies often define their general
business objectives as profit maximization, growth and development, and
market share increase, none of these is sufficiently comprehensive to ensure that
the requirements of all stakeholders are met. Some authors (Rappaport, 2006;
Lazonick and OSullivan, 2000) suggest that the majority of modern companies,
as a general objective (mission) of their businesses, identify shareholder value
maximization, usually defined as the present value of future free cash flows.
Shareholder value maximization is considered to be a sufficiently comprehensive
objective to ensure the satisfaction of the requirements of most stakeholders
(Stani, 2006; Jensen, 2001), and is a cornerstone of the value-based management
(VBM) approach.
At the base of all value creation models are several key value drivers that determine
the amount and the present value of expected cash flows. These key value drivers
are return on invested capital (ROIC), weighted average cost of capital (WACC),
expected company growth rate, and competitive advantage period (the period
during which the company expects to generate a difference between the return
on invested capital and the weighted average cost of capital). The value is created
when a company succeeds in achieving a positive performance spread, i.e., when
ROIC exceeds WACC. Negative performance spread is a reliable sign that current
business activity is destroying the value of a company. The amount of value
created or destroyed is the product of invested capital and performance spread.
Moskalev and Park (2010) suggest that the corporation must be built on the
core concept of value, and that the firms organization, strategy, processes,
communication, everything the firm does, must be consistently aligned with the
key value drivers. They further suggest that if VBM is successfully implemented,
then corporate culture will support and encourage corporate governance
mechanisms consistent with value creation at all levels within the organization.
The link between corporate governance and corporate valuation has been
investigated in several studies (Dahya et al., 2008; Durnev and Kim, 2005).
These studies show that strong governance can protect the interests of minority
shareholders and improve company performance, even more in countries with
weak than in countries with strong legal protection of investors.

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Value-Based Management in Serbian Corporations

This paper aims to investigate characteristics of internal governance mechanisms

in the context of value-based management and the specific economic and cultural
conditions within which corporations in Serbia operate. We conduct the analysis
using a multiple case method on a sample of seven corporations in Serbia. We
build our analysis on several previous papers that use the multiple case method to
investigate similar corporate problems. We expect that our research will provide
an insight into the corporate culture, corporate objectives, and performance
measures used in the large publicly traded companies from different industry
sectors in Serbia. This insight is the basis for understanding the factors influencing
the corporate culture and governance of Serbian companies, and for the future
theoretical and empirical investigation of this problem.

2. THEORETICAL BACKGROUND

Value-based management (VBM) can be defined as a framework for targeting

those business decisions that consistently add economic value to a company (Morin
and Jarrell, 2001). It is also a managerial approach in which company objectives,
systems, strategies, processes, performance measurements, and culture have as
their guiding objective shareholder value maximization. The simple concepts
behind VBM are value and value creation. The value of a company is determined
by its discounted future cash flows, and value is created when a company invests
capital at returns that exceed the cost of that capital. Copeland et al. (1994) point
out that VBM extends these concepts by focusing on how companies use them to
make strategic and operating decisions.
Copeland et al. (1994) also suggest that VBM focuses on better decision making
at all levels in an organization, and calls on managers to use value-based
performance measures for making better decisions. Similarly, Todorovi (2010)
points out that value-based performance measures are particularly useful because
they show managers how they can create value, while Kalianin (2005) points
out that these measures provide the motivation for managers in the selection
and implementation of those options that maximize value. However, managers
still often use measures based on accounting data (according to Fitzgerald, 2007).
Although this approach is obviously simpler, it results in only partially accurate
indications and suboptimal decisions, since accounting data weakly correspond
with factors determining shareholder value (upi, 2011; Rappaport, 2006;
Stewart 2003). This is confirmed in many empirical studies showing that value
measures are more significantly related to shareholder returns than accounting
measures (e.g., Wet and Toit, 2007; Wortington and West, 2004; OByrne, 1996).
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Economic Annals, Volume LVII, No. 193 / April June 2012

Although the original idea behind VBM was to align the measurement system
with value creation in a way that accounting measurement systems did not,
some authors suggest that too much focus on performance measurement caused
serious problems in VBM implementation. For example, Koller et al. (2005) argue
that many VBM programmes failed because companies developed objective and
comprehensive value-based measurement systems, but neglected management
processes and corporate governance. Morin and Jarrell (2001) argue that investing
in relationships with shareholders and other stakeholders can add value, while
Rappaport (2005) believes that a company can better realize its potential for value
creation by aligning the interests of shareholders and managers, and providing
investors with value-relevant information.
Some authors empirically investigate the importance of corporate governance
for improving company performance. Dahya et al. (2008) and Durnev and Kim
(2005) find that strong governance (primarily a strong board) can protect the
interests of minority shareholders and improve company performance, and even
more so in countries with weak than in countries with strong legal protection of
investors. Coombes and Watson (2000) show that investors in the US and UK
are willing to pay up to 18% more for shares of companies with good governance
than for the shares of companies with similar performance but poor practice
of corporate governance. Barton and Wong (2006) show that investors in
developing countries are ready to pay from 20%-40% more for shares with good
governance. Mitton (2002) finds that firms with higher disclosure quality, greater
transparency, and higher outside ownership concentration experience better
stock price performance during periods of crisis.
The general model of corporate governance, aimed at resolving the agency problem
that arises between the agent (manager) and the principal (shareholders), which is
typical in economic systems with strong legal protection of investors where the roles
of managers and owners are clearly divided (Jensen and Meckling, 1976), cannot
be used as a starting point for investigating the relationship between corporate
governance and company performance in developing economies. An insufficiently
developed institutional context in developing economies makes the enforcement of
agency contracts and protection of investors more costly and problematic (Wright
et al., 2005). This results in the prevalence of concentrated firm ownership, which
acts as the major governance mechanism in developing countries. Concentrated
ownership, combined with an absence of effective protection of minority investors,
results in more frequent conflicts between dominant (ultimate, controlling)
shareholder and minority shareholders (Young et al., 2008; Shleifer and Vishny,
1997), with negative consequences for firm performance.
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Value-Based Management in Serbian Corporations

In developing countries with weak legal protection of investors, corporate

governance is the means by which minority shareholders are protected from
expropriation of their rights by managers and the dominant shareholder.
Institutions that are important external governance mechanisms in developed
countries, such as the stock exchange, securities regulators, institutional investors,
and the judiciary, are weak in developing economies. A high quality of disclosure
and strong boards of directors are, therefore, besides ownership concentration,
the most important internal governance mechanisms in developing economies.
Many authors stress the importance of internal governance mechanisms
regardless of economy development. Morin and Jarrell (2001) pointed out that
the three main areas of corporate governance are performance measurement,
the compensation system, and investor communication, while Mitton (2002)
put special emphasis on disclosure quality, ownership structure, and corporate
diversification. La Porta et al. (1998) argue that accounting standards play a
critical role in corporate governance by informing investors and by making
contracts more verifiable.

3. EMPIRICAL RESEARCH
3.1. Context of the analysis

Serbia has a civil law legal system, and belongs to the group of emerging and
developing countries. In many studies (e.g., Johnson et al., 2000; La Porta et al.,
2000) civil law countries have been linked with strong regulation but weak effective
(institutional) protection of investors, particularly minority shareholders. In the
case of Serbia this is confirmed in The World Bank global report Doing Business
2011, which shows that Serbia ranks better in legal (measured by strength of
investor protection index) than in effective judicial (measured by enforcing
contracts index) protection of investors. Among 183 economies Serbia is ranked
74th in protecting investors, and 94th in enforcing contracts. Kalianin (2005)
argues that Serbian corporations are not motivated to be transparent in business
and do not feel pressure from shareholders to deliver the required returns or
to create value for them. The shareholders are subjects of attention only if they
are dominant (which is often); but then the problem of protecting minority
shareholders arises.
The process of transition, which caused changes in the institutional and economic
system and in the ways companies operate and in which managers and staff behave,
has motivated some Serbian companies to introduce technology and management
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Economic Annals, Volume LVII, No. 193 / April June 2012

systems recognized and used by the successful companies operating in developed

market economies (Bogievi Miliki et al., 2008). For example, Bogievi Miliki
and Janiijevi (2009) show that performance evaluation systems (PES) have
become an institutionally accepted way of operating in Serbian companies such
as Tarket, Telekom Srbija, etc. Medicinal products manufacturer Hemofarm was
one of the pioneers among Serbian corporations in using VBM methodologies. In
the annual report for 2003 Hemofarm reports: In the course of 2003 Hemofarm
Group introduced innovative instruments of monitoring financial performance
in cooperation with the structurally major shareholder Aktiva. The Economic
Value Added concept became the key instrument for performance evaluation at
the Strategic Business Unit levels.
3.2. Research methodology

The attitude of companies in Serbia toward value-based management, corporate

governance, and performance measurement is relatively unknown. That is
why we use the multiple case method, which is suited to researching unknown
subjects (Bogievi Miliki and Janiijevi, 2009), i.e., for getting in-depth
and first-hand understanding of a particular situation (Yin, 2004). Yin (2004)
defines the case study research method as an empirical inquiry that investigates
a contemporary phenomenon within its real-life context, when the boundaries
between the phenomenon and the context are not clearly evident, and in which
multiple sources of evidence are used. Unlike single case studies, multiple case
studies permit replication and extension between individual cases, which helps
researchers to understand patterns more easily, to eliminate chance associations,
and to form better theoretical structure (Eisenhardt, 1991).
The multiple case method has been used in several studies on corporate
governance and performance measurement systems (Bogievi Miliki and
Janiijevi, 2009; Chen and Guliang, 2009; Kennerly and Neely, 2002). While
there is no ideal number of cases, a number between four and ten usually works
(Eisenhardt, 1989), so we design a seven-case study. We analyse seven large
(according to Serbian Accounting and Audit Law, RS Official Gazette, Nos.
46/2006 and 111/2009) publicly traded companies. As in Chen and Guliang
(2009) and Kennerly and Neely (2002), companies from different industry sectors
and with a wide variety of competitive and organizational characteristics were
intentionally chosen to introduce diversity into the sample, and to enable the
identification of factors affecting the evolution of measurement in a variety of
different circumstances. We also chose companies from different Belgrade Stock
Exchange (BSE) markets (regulated and unregulated) because we wanted to
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Value-Based Management in Serbian Corporations

investigate if listing requirements had influenced the way companies behaved.

General characteristics of the companies involved in the research are shown in
Table 1.
The research took place during 2008, and the data was collected by referring to
publicly available data (annual reports, Business Registers Agency, and company
web sites), and through questionnaires and phone interviews with top managers
and employees designated by the top manager. The questionnaire and interview
were designed to get the answers to the following four questions:
a) How does the company communicate with its shareholders?
b) How does the company define its general and additional objectives?
c) Is the company aware of the existence of the value-based management concept?
Does the company use this concept, or try to implement it?
d) What performance measures does the company use?
This research is intended to provide an insight into the corporate culture, corporate
objectives, and performance measures used in the large publicly traded companies
from different industry sectors. This insight is the basis for understanding the
factors influencing corporate culture and governance of Serbian companies, and
for the future theoretical and empirical investigation of this issue.
Table 1. Basic information on business cases
Company Industry
1
2
3
4
5
6
7

Production of non-electrical
household appliances
Production of rusks, biscuits,
preserved pastry goods and cakes
Production of soft drinks, mineral
waters and other bottled waters
Production of enamel, stainless steel
and non-stick cookware
Production of furniture
Production of footwear, technical
rubber goods and chemical products
Wholesaler of medications and
medical products

Total sales Total assets Belgrade stock

in 2008
in 2008
exchange
(000 )
(000 )
market
Regulated
35,515
40,537
market
Unregulated
64,547
72,125
market
Unregulated
71,880
78,674
market
Regulated
6,300
39,317
market
Unregulated
62,591
190,214
market
Regulated
2,845
45,909
market
Unregulated
129,913
298,761
market

Source: Belgrade Stock Exchange, Business Registers Agency and company web sites

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Economic Annals, Volume LVII, No. 193 / April June 2012

3.3. Research findings

We first analyse the ownership and board structure of the companies in our
study. Table 2 shows that all the companies in our study have a controlling
shareholder. Controlling shareholder is defined as a single owner of voting rights
in a company, providing that it controls at least 10% of the companys votes
(Dahya et al., 2008; La Porta, 1998). The mean of equity holdings of the three
largest shareholders is 56%, which is considerably more than in emerging (51%)
and developed economies (41%), as reported by Young et al. (2008).
The mean of board size is 8.43 directors, which is consistent with the 7-12 directors
reported in several studies on boards of non-financial firms from developed
and developing countries (Dahya et al., 2008; Andres et al., 2005). On average,
independent directors account for 30.08% of directors on the board, which is
considerably less than the average proportion of independent directors (around
80%) reported for banks (Adams and Mehran, 2008; Andres and Vallelado, 2008),
and the average proportion of independent directors (at least 38%) reported for
non-financial firms (Dahya et al., 2008; Andres et al., 2005).
The implication of these results is that the dominant shareholders of companies
in Serbia tend to appoint weak boards, which can lead to serious conflicts between
dominant and minority shareholders in the absence of developed external
governance mechanisms. In addition, companies that are traded on the regulated
markets of the BSE (1, 4 and 6) have a lower ownership concentration ratio, which
could be due to the requirement for these companies to have at least 25% of shares
in free float. These companies also tend to have smaller boards of directors and a
lower proportion of independent directors on the board.
Table 2. Ownership and board structure in the business cases
Company
1
2
3
4
5
6
7
Mean

Equity holding Equity holdings

of the largest
of the largest
owner
three owners
24.77%
41.65%
63.72%
69.61%
58.07%
99.29%
11.07%
24.69%
44.26%
44.81%
33.70%
47.02%
23.02%
64.91%
36.94%
56.00%

Source: Authors survey data

100

Board
size
7
7
7
7
11
9
11
8.43

% of nonexecutives on
the board
57.14%
100.00%
100.00%
71.43%
63.63%
55.55%
63.63%
73.05%

% of independent
directors on the
board
14.29%
28.57%
28.57%
71.43%
27.27%
22.22%
18.18%
30.08%

Value-Based Management in Serbian Corporations

We further analyse the way companies communicate with their shareholders.

Table 3 shows that all the companies, except for company 5, use annual reports
as the most important or second most important means of communication with
shareholders, which is consistent with some recommendations for enhancing
shareholder value (Morin and Jarrell, 2001). Companies also tend to communicate
with shareholders at Shareholders Meetings, described by Strenger (2006) as
the premier governance instrument for shareholders to directly articulate their
concerns. Companies rarely use phone, mail, Internet, or dividend payments;
methods of communication and signals that have become preferred in developed
economies over the past ten years (Romanek and Lee, 2006).
Companies traded on the regulated BSE markets offer more publicly available
information and pay dividends to shareholders on an annual basis. Information
on companies traded on the unregulated market is often hard to find, and these
companies do not pay dividends on a regular basis. This is more often the case
if a company has higher ownership concentration ratio and a lower proportion
of independent directors on the board. This could be due to stricter criteria
for listing on the regulated market, and the fact that controlling shareholders
with larger equity holdings are less interested in shareholder expectations and
dividend signalling. The implication of this finding is that the corporations in
Serbia are interested in communication with shareholders only to the degree that
is required by law or other regulations. This is consistent with studies showing
that countries with civil law legal systems have strong regulation but weak
protection of investors, particularly minority shareholders (La Porta et al., 2000).
We continue our multiple case study by investigating the way companies include
shareholder expectations in general and additional objective definitions. Table
3 shows that all the companies, except for company 2, believe that shareholders
expect long-term stability from them, as opposed to four companies (2,3, 4
and 7), which list short-term profit maximization as their primary objective.
Furthermore, two (2 and 7) out of four profit maximization companies list share
price increase as the primary shareholder expectation. Share price increase is one
of the elements of total shareholder return and in line with shareholder value
maximization. Hence the controversy: this implies that the fact that a company
recognizes shareholder expectations does not have to mean that the company is
shareholder value-oriented.

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102

1. Annual reports

1. Annual reports

1. Internet
2. Shareholders Meeting
3. Press releases

1. Shareholders Meeting
2. Annual reports
3. Internet

1. Shareholders Meeting
2. Annual reports
3. Phone and mail

Source: Authors survey data

1. Annual reports
2. Shareholders reps
3. Shareholders Meeting

How do you preferably

communicate with your
Company
shareholders? (listed in
order of priority)
1. Annual reports
1
2. Internet
3. Press releases

What do shareholders
What is the general
expect from your
What are the additional
(primary) objective of
company? (listed in order
objectives of your company?
your company
of priority)
1. Long-term stability
Expanding the range of
Sustaining leadership
other programmes
2. Growth and development
position in core business
3. Market share increase
Penetrating new markets
Increasing market share,
1. Market share increase
Shifting towards more
2. Share price maximization Profit maximization
profitable products,
3. EPS maximization
Strict cost management
Increasing the amount and
1. Long-term stability
Profit maximization
value of production and
sales
1. Long-term stability
Increasing market share,
2. Growth and development Profit maximization
Customer satisfaction
3. High dividend payments
Employee satisfaction
Increasing sales
1. Growth and development
Sustainable growth and Increasing product quality
2. Long-term stability
development
Increasing the number of
3. Social responsibility
employees
Sustaining and creation
1. Growth and development
Profit maximization
of value for owners,
2. Long-term stability
Increasing market share
business partners and
3. EPS maximization
Increasing product quality
employees
1. Share price maximization
Increasing market share
Long-term stability and
2. Long-term stability
Increasing competitiveness
profit maximization
3. Growth and development
Social responsibility

Table 3. Communication with shareholders and companies objectives (summary of questionnaire results)

Economic Annals, Volume LVII, No. 193 / April June 2012

Value-Based Management in Serbian Corporations

The ability of companies 1, 5 and 6 to recognize long-term stability and

sustainable growth and development and not to highlight profit maximization
as the primary corporate objective implies that they take care of shareholders
interests. Furthermore, managers in company 1 state that they make decisions
consistent with the aim of exceeding the minimal required rate of return of 10%,
while managers in company 6 are focused on obtaining and exceeding the rate
of return expected by owners. However, only companies 5 and 6 directly build
shareholders expectations into their primary objective. Company 5 is completely
dedicated to fulfilling shareholders expectations, since it defines its primary
objective precisely as recognizing shareholders expectations sustainable growth
and development. Company 6 is the only company in our study that defines its
primary objective as sustaining and creating value for owners, business partners
and employees, i.e., as creating value for shareholders and other stakeholders.
Besides company 6, traces of orientation to other stakeholders can be found in the
objective definitions of companies 5 and 7, while other companies do not mention
other stakeholders even in secondary objectives. Interestingly, companies 1 and
6, which are the only companies in our study that pay dividends on an annual
basis, do not believe that shareholders expect high dividend payments.
Table 4 shows that all the companies in our study use traditional accounting and
market measures of performance. Company 6 uses the largest set of measures,
and it is the only company in our study where other measures besides traditional
accounting (net profit and earnings before interest and taxes) or market (dividend
per share) measures are used. This company uses total shareholder return (TSR)
and cash flow return on investment (CFROI). None of the companies use economic
value added (EVA), market value added (MVA), or total business return (TBR).
Companies tend to rely on traditional capital budgeting techniques (payback
period and accounting rate of return), but all the companies use at least one
discounted cash flow investment appraisal technique (net present value, internal
rate of return, or benefit/cost ratio). In four companies managers use payback
period as a primary capital budgeting technique, which means that managers in
these corporations are more interested in capital turnover rate (project liquidity)
than in profitability. This fact can be explained by the lack of shareholder value
orientation among companies in our study, as well as by the liquidity problems
of Serbian corporations and the limited number of funding mechanisms. The
majority of companies use internal rate of return, which again shows that Serbian
corporations are concerned with the way each unit of capital is used.
Table 4 shows that the managers of four companies have heard of VBM, while
two companies implement VBM. Among companies that have never heard of
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VBM are companies 2, 3, and 4, which define their primary objectives as profit
maximization. Company 1, which is shareholder value-oriented, has heard
of VBM but does not implement it. Companies 5 and 6, which are identified
as the most shareholder value-oriented, are the only companies in our study
that actually implement VBM. Company 5 implements VBM with the help of
several institutions and consulting agencies, while the managers of company 6
state VBM is in the basis of all the decisions made. However, our finding and
conclusions can be challenged by the fact that company 5 uses only accounting
measures of performance, while company 6 uses payback period as the primary
capital budgeting technique. Our findings concerning VBM application and
performance measures are not very different from findings of some other studies
(Bouwens and Van Lent (2007); Marr, 2004; Ryan and Trahan, 1999).
We now turn to investigating the influence of the corporate governance
characteristics of companies in our study on shareholder value orientation,
objective definition, and performance measures used. Companies 2 and 3,
which have the largest dominant owners, define their primary objective as
profit maximization, which is certainly an acceptable objective for a dominant
shareholder, but is not an acceptable objective for minority shareholders and
other stakeholders. These two companies use only accounting earnings and ROA
as performance measures, and have never heard of VBM. On the other hand,
the three companies (1, 5 and 6) that were identified as the most shareholder
value-oriented, and the two companies (5 and 6) implementing VBM, belong
to the group of companies with lower ownership concentration (1, 4, 5, and 6),
measured by the equity holdings of the largest three owners.

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 Accounting earnings
Return on assets (ROA)
Dividend per share (DPS)

Accounting earnings
Return on assets (ROA)

Source: Authors Survey data

Accounting earnings
Return on assets (ROA)

Accounting earnings
Return on assets (ROA)
Price-earnings ratio (P/E)
Dividend per share (DPS)
Total shareholder return (TSR)
Cash flow return on investment (CFROI)
Accounting earnings
Return on assets (ROA)
Price-earnings ratio (P/E)

Accounting earnings
Return on assets (ROA)

Accounting earnings
Return on assets (ROA)
Dividend per share (DPS)

What performance measures do you use?

Company

Yes

Yes

1. Net present value

2. Internal rate of return

Yes

1. Benefit/cost ratio
2. Reciprocal of payback period
3. Internal rate of return
1. Payback period
2. Internal rate of return
3. Accounting rate of return

No

No

No

Yes

Have you
ever heard of
VBM?

1. Payback period
2. Internal rate of return

What capital budgeting

techniques do you use? (listed
in order of priority)
1. Payback period
2. Benefit/cost ratio
3. Accounting rate of return
1. Net present value
2. Internal rate of return
3. Payback period
1. Payback period
2. Accounting rate of return
3. Net present value

Table 4. Value-based management and performance measures (summary of questionnaire results)

No

Yes

Yes

No

No

No

No

Are you
implementing
VBM?

Value-Based Management in Serbian Corporations

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Economic Annals, Volume LVII, No. 193 / April June 2012

In regard to the influence of the board structure as a second important variable

of corporate governance, it seems that the percentage of non-executive and
independent directors does not play a role in corporate shareholder value
orientation, implementation of VBM, performance measurement, and capital
budgeting techniques choice. Company 2 with 100% of non-executive directors
is the only one that does not list long-term stability as the shareholders
expectation, has never heard of VBM, and quotes profit maximization as its
primary objective. Similarly, company 3, whose board also consists entirely of
non-executive directors, uses only accounting earnings and return on assets
(ROA) as performance measures and payback period as its primary capital
budgeting technique, states profit maximization as its primary objective, and has
never heard of VBM. Company 4 is in the same situation, which is the company
with the highest proportion of independent directors on the board. In contrast,
companies that are value oriented (1 and 6) have the lowest percentages of nonexecutive and independent directors. The implications of our findings concerning
corporate governance are that ownership concentration is the major governance
mechanism of Serbian corporations, and that the structure of the boards of
directors is a weak governance variable (mechanism) in Serbian corporations.
Based on research findings, we identify several factors influencing corporate
culture, corporate objectives, and choice of performance measures of large
publicly traded companies in Serbia. These are:
1) Civil law legal system - Serbia is a civil law country with weak de jure and de
facto shareholder protection. Consequently, companies have a high degree
of ownership concentration and tend to take shareholder interests and
requirements into consideration only to the degree that is required by law and
other regulations.
2) Belgrade stock exchange (BSE) rules - Companies traded on the regulated (Prime
and Standard) BSE markets communicate better with their shareholders. The
reason is stricter rules for listing the shares on regulated than on unregulated
markets.
3) Funding mechanisms - Along with characteristics of the legal system, BSE does
not provide incentives for using IPO as a funding mechanism for corporations.
Therefore, corporations do not feel pressure from the capital market and
shareholders to create high shareholder returns, pay dividends, and regularly
inform shareholders.
4) Uninformed managers Managers of three of the surveyed corporations have
never heard of value-based management, while managers of another three
corporations heard about this concept thanks to Serbian scientific sources.
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Value-Based Management in Serbian Corporations

That is, scientific and professional papers are available in the Serbian language,
and several institutions (or agencies) provide consulting services in the area
of value based management, but still many managers have not heard anything
about value-based methodologies and value measures of performance.
Bearing in mind key factors determining the relations between corporations and
shareholders in Serbia, we identify two important preconditions for improving
these relations. The first precondition is improvement of the legal framework. The
New Law on the Capital Market (Official Gazette RS, No. 31/2011) relies on a new
market development strategy advocating an upgrade of the stature of the BSE
by removing from admission to trading those companies in which there is no
significant trading interest. It provides better protection of shareholders rights
and provides for the establishment of an Investor Protection Fund. The law also
regulates public offerings, which could motivate corporations in Serbia to use this
funding mechanism. Also, the new Law on Companies (RS Official Gazette, No.
36/2011), although not substantially different from its previous version, provides
more detailed and precise provisions and allows corporations to choose between a
one-tier and a two-tier board, which is in accordance with EU regulations. These
two laws should provide a better legal framework for the operation of Serbian
corporations, better protection of investors, and better communication between
corporations and their shareholders.
The second precondition is development of the BSE and strengthening of the
Securities Commission by providing adequate supervision and enforcement.
Along with a better legal framework that clearly defines the supervisory role of
the Securities Commission by directing its focus on those regulatory activities
that are the most important in achieving investor protection and fair and orderly
trading of securities, this precondition should provide efficient functioning of the
market and attract more individuals and foreign investors to the BSE. We believe
that these two preconditions, as well as institutional investors and foreign direct
investment, are going to significantly determine the direction and degree of the
development of corporate governance and performance measures in Serbian
corporations.

4. CONCLUSIONS

Value-based management places the need for an integrated approach to company

management at the forefront, which includes the definition, implementation, and
evaluation of strategic and operational decisions with respect to the objective
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of shareholder value maximization. The performance measures developed

in the context of value-based management are an important factor of valuebased management implementation and business improvements. However, too
much focus on performance measurement can cause serious problems in VBM
implementation, as reported in several studies. Companies must also rely on
governance mechanisms and comprehensive management processes in order to
meet different information requirements and improve business performance.
The ownership concentration in Serbian corporations is very high, while
the proportion of independent directors on the board is small if compared to
statistics reported from samples of non-financial firms in developed countries.
In other words, dominant shareholders tend to appoint weak boards, which can
lead to serious conflicts between dominant and minority shareholders. In the
absence of strong boards, policy makers in Serbia should develop better legal
and institutional mechanisms for protecting minority shareholders. Companies
traded on the regulated markets of the Belgrade Stock Exchange have a lower
ownership concentration ratio, tend to have smaller boards of directors and a
lower proportion of independent directors on the board, and are more likely to
take expected rate of return into consideration.
Corporations in Serbia are interested in communicating with shareholders only
to the degree that is required by law or other regulations. Companies that are not
traded on the regulated markets of the Belgrade Stock Exchange have a higher
ownership concentration ratio and a lower proportion of independent directors
on the board, offer less publicly available information, and do not pay dividends
on a regular basis.
Corporations usually believe that shareholders expect long-term stability,
growth, and development, as well as market share increase, but only three of
them are really shareholder value-oriented. This means that, although a company
can recognize shareholder expectations, it is not consequently oriented towards
shareholder value maximization.
All the surveyed companies use traditional accounting and market measures
of performance, while none of the companies use EVA, MVA, or TBR. Only
one company in our study uses total shareholder return (TSR) and cash flow
return on investment (CFROI). Companies tend to rely on traditional capital
budgeting techniques, but all the companies use at least one discounted cash
flow investment appraisal technique. As for value-based management, we find
that the three most shareholder value-oriented companies have heard of VBM,
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and two of them are actually implementing VBM. The implications of our
findings concerning the relation between corporate governance and VBM are
that ownership concentration is the major governance mechanism of Serbian
corporations, and that boards of directors are the weak governance mechanism
in Serbian corporations.
Based on research findings, we identify four factors influencing corporate
governance, corporate objectives, and choice of performance measures of
large publicly traded companies in Serbia. These are the civil law legal system,
the Belgrade Stock Exchange market on which companys shares are traded,
limited funding mechanisms, and uninformed managers. Bearing in mind
these factors, we identify two important preconditions for improving relations
between corporations and shareholders and the ability of corporations to create
shareholder value: 1) improving the legal framework, and 2) the development of
the Belgrade Stock Exchange and strengthening of the Securities Commission.
We emphasize external factors and preconditions for improving relations
between corporations and shareholders because the characteristics of Serbian
culture (see Janiijevi, 2003) and the legal system foreground external incentives
to managers and investors actions, and not internal or individual initiatives.
Our research has several limitations, one of which is the small number of
corporations that are investigated. However, we believe that it gives a useful
insight into the corporate culture, corporate governance, and performance
measures used in large publicly traded companies from different industry sectors
in Serbia. This insight provides a basis for understanding the factors influencing
the corporate governance and performance measurement systems of Serbian
corporations, and for the future theoretical and empirical investigation of this
problem. Future research should focus on investigating the particular business
areas in which VBM is used and factors that limit or motivate the use of specific
governance mechanisms or performance measures.
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