Wealth Creation: A Systems Mindset for Building and Investing in Businesses for the Long Term (Wiley Finance Series) »

Bartley J. Madden is an independent researcher whose current focus is on market-based solutions to public policy issues, including FDA reform and corporate governance. In 1969, Madden cofounded Callard, Madden & Associates, where his research was instrumental in developing the CFROI (cash-flow-return-on-investment) valuation model that has become an integral part of the investment process for many large money management firms. He later managed portfolios for Harbor Capital Advisors. In the early 1990s, Madden joined HOLT Value Associates, a firm created to commercialize the CFROI valuation model worldwide. Madden retired in 2003 as a managing director of Credit Suisse, which acquired HOLT. He is the author of CFROI Valuation: A Total System Approach to Valuing the Firm.

The competitive life-cycle framework—and its relation to stock valuation—is based on the premise that competition and capital flows operate over the longer term to force a firm's economic returns toward the cost of capital. In short, the pattern of a firm's economic returns and reinvestment rates reflects an unending struggle between managerial skill and competition over time. The life-cycle framework, as explained in this book, provides an insightful and intuitive way to understand levels and changes in stock prices over time. It is widely used by institutional money managers in order to make better investment decisions.

Throughout the book, the common thread is a systems mindset for understanding societal attitudes and institutions that hinder or promote wealth creation and the complex activities of business firms in efficiently meeting customer needs. Such a mindset focuses attention on the underlying processes and related incentives that drive the overall system results, and especially on the importance of continual firm-wide learning to improve those processes.

The life-cycle framework provides a unique lens for seeing through a firm's short-term financial results to better gauge likely long-term wealth creation or destruction. Company examples showcase the analytical usefulness of life-cycle track records and present a bottom-up view of how—in a free-market economy—customers, employees, and shareholders have mutual, long-term interests.

Madden details opportunities for higher, sustainable economic growth through voluntary, private sector initiatives. As to improved management, he analyzes both the difficulty in duplicating lean principles pioneered by Toyota and the related potential for sustained competitive advantage. As to improved corporate governance, he describes a novel approach for boards of directors to ensure that management follows a wealth creation path.

Preface.

Acknowledgments.

Chapter 1 A Systems Mindset.

How We Know What We Think We Know.

The PAK (Perceiving-Acting-Knowing) Loop.

Purposes.

Perceptions.

Cause and Effect.

Actions and Consequences.

Feedback.

Knowledge Base.

Examples of Systems Thinking and Problem Solving.

High-Reliability Organizations.

Eli Goldratt, Business Theorist.

Colonel John Boyd, Military Theorist.

Correlation, Causality, and Control Systems.

Summary of Key Ideas.

Chapter 2 The Wealth-Creation System.

The Perception of Free-Market Capitalism.

The Housing and Credit Crisis of 2008-2009.

Government Regulation and Unknown Risks.

The Standard of Living.

Summary of Key Ideas.

Chapter 3 The Ideal Free-Market System.

Components of a Free-Market System.

Consumer Wealth, Producer Wealth, and Competition.

Efficiently Providing What Consumers Want.

Summary of Key Ideas.

Chapter 4 The Competitive Life-Cycle View of the Firm.

Competitive Life-Cycle Framework.

Firms’ Competitive Life Cycles and Dynamism.

Company Examples.

Eastman Kodak.

IBM.

Digital Equipment.

Apple.

Bethlehem Steel.

Nucor.

Kmart.

Medtronic.

Walgreen Company.

Donaldson Company.

Life-Cycle Observations.

Summary of Key Ideas.

Chapter 5 The Life-Cycle Valuation Model as a Total System.

Efficient Markets versus Behavioral Finance.

Valuation Model Principles.

Measurement Units.

Forward-Looking, Market-Derived Discount Rates.

Problems with CAPM Cost of Capital.

Improving the Valuation Process.

Investor Expectations: The Wal-Mart Example.

Critical Accounting Issues.

Reply to Critics.

Summary of Key Ideas.

Chapter 6 Business Firms as Lean, Value-Added Systems.

Lean Thinking and PAK Loop Components.

Knowledge Base.

Purposes.

Perceptions.

Cause and Effect.

Actions and Consequences.

Feedback.

A Lean Transformation Example: Danaher.

Summary of Key Ideas.

Chapter 7 Corporate Governance.

A Systems View for Corporate Governance.

Corporate Governance Needs Repair.

A Standard of Performance for Boards.

A Successful Cultural Transformation Example: Eisai Co., Ltd.

Shareholder Value Review.

Valuation Model Selection.

Value-Relevant Track Records.

Business Unit Analyses.

Reply to SVR Objections.

SVR as an Evolutionary Process.

Summary of Key Ideas.

Chapter 8 Concluding Thoughts.

Benefits for Public Policy Makers.

Benefits for Business Managers.

Benefits for Investors.

Notes.

References.

About the Author.

Index.