Reforming Corporate Governance, Discounted Cash Flow Models - Essay Example

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The paper 'Reforming Corporate Governance, Discounted Cash Flow Models" discusses that DCF models by nature are known to give directors the ability to maximize the value of shareholders in a manner that can be monitored. They highlight the differences between cash flows and accounting accruals…
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In the recent past, corporate boards shave received considerable attention following the WorldCom, Enron and Tyco scandals. This is primarily in the question of why the directors of these companies failed to uncover accounting malpractices or object to the illegal siphoning of company funds. While several attempts have been made to try explaining this “oversight” phenomenon, one explanation stands quite clearly; many boards only act as rubber stamps without adequately minding the welfare of shareholders (Slogan Management Review, n.d).
According to some experts, the main role of directors is to facilitate the maximization of shareholder value through the management team. This is best done when they understand the company’s value creation process and have analytical tools such as a discounted cash valuation model that helps in forecasting revenues, expenditures and other performance measures.
Discounted Cash Flow Models
DCF (discounted cash flow) models have been used in the past to record and track company performance and would especially be used during crises (Slogan Management Review, n.d). Out of them, finance experts would be able to determine whether the information presented by directors is grossly incomplete or misleading. It is, however, a fact that the model is subject to manipulation and may not reflect the true state of events.
Yet again, DCF models require the explicit accounting of resources for future growth while also providing an additional tool for executive compensation. Such models, in spite of their numerous advantages, may not be able to detect false revenues among other accounting tricks (Slogan Management Review, n.d) such as was in the case of Enron.
With the aim of solving problems related to the incompetence of governing boards, some organizations have opted to redefine the role of their directors. Such measures are taken to ensure that board members act in the best interest of shareholders in all their activities. Some critics have also suggested that a separate staff should be dedicated to the boards to help them effectively discharge their duties. Read More
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