Formation of an algorithm for increasing the market value of a corporation

Njoroge Parmenas Kimani ORCID: 0000-0002-5285-8944 Lecturer; Faculty of Management; Southern Federal University 344090, Russia, Rostov region, Rostov-On-Don, Stachki ave., 200/1k1, office 204 ndzhoroge@sfedu.ru

Introduction

Ak t uality. Given the importance of firm value formation in modern academic discourse, previous studies have examined the factors that increase the value of a company, focusing on aspects such as ESG, human capital management, transparency of information disclosure and strategic planning. The need to create a structured approach to increasing the market value of a corporation that will provide managers with a tool for making informed decisions that take into account the interconnection of all important factors and contribute to the sustainable growth of business value.

A literary review. The role of sustainability (including ESG factors) in the development of firm value formation was discussed in the work of Charaev, M. V. ^{[2, pp. 109-120]}, Qureshi, M. ^{[12, pp. 1199-1214]} and Ammer M., et al. ^{[1, pp. 1-21]}. The role of information disclosure in increasing sustainability was discussed in studies by Jiao, Yu. ^{[8, pp. 647-676.]} and Velte, P. ^{[14, pp. 997-1061.]} In addition, Miller, K. et al. ^{[10, pp. 1649-1665.]} emphasizes the need for a strategic corporate plan that will help make decisions and formulate value.

A scientific gap. Although extensive research has examined the factors that affect the value of a company, thereby emphasizing the importance of corporate governance in the decision-making process, there remains a need to synthesize these findings into a comprehensive decision-making algorithm. Such an algorithm would provide managers with a structured approach to value formation.

The purpose of this study is to create an algorithm for the formation of the market value of the company. The algorithm is based on making strategic financial decisions that take into account two key factors: financial disclosure and the inclusion of ESG factors in integrated financial statements. The purpose of the algorithm is to make decisions aimed at sustainable growth of corporate value.

The novelty of the research lies in the development of a comprehensive strategy to increase the market value of the company. This strategy is a decision-making algorithm based on four key factors: the integration of ESG factors into the company's activities, transparency of information, effective human capital management, and the development of a strategic corporate plan. This algorithm is designed to provide practical recommendations for increasing the market value of the company.

The author's hypothesis. In the modern realities of financial management, decisions should be aimed at increasing the value of the company. According to experts, companies that demonstrate social responsibility, transparency in their activities and adhere to a long-term value creation strategy are more likely to outperform their competitors. To achieve this goal, a decision-making algorithm is proposed, which includes the following stages: Analysis of the internal and external environment of the company: Development of a long-term corporate financial strategy: Increase in social capital: This is achieved by creating a positive image of the company based on its social responsibility and transparency.

Methodology. To develop a decision-making algorithm aimed at increasing the value of the company, a systematic review of the literature on factors influencing the formation of the company's value was conducted. The study used systematic analysis and algorithmic representation of concepts in the form of diagrams, which made it possible to formulate a decision-making algorithm.

The role of sustainable development in improving the company's value formation

The role of sustainable development in shaping the company's value has attracted the attention of various researchers. Qureshi, M., et al. ^{[12, pp. 1199-1214]}, investigate the role of sustainable development in increasing the value of a firm by analyzing 812 large European companies for the period from 2011 to 2017. Using the Olson J. A. price benchmarking model ^{[11, pp. 661-687]} to measure the value of a firm, the study considers the impact of the industry sector, the ratio of female directors on the board of directors and ESG indices (environmental, social and managerial aspects) as independent variables. In addition, the analysis controls proprietary variables such as total assets and long-term liabilities relative to equity, as well as temporary factors specific to the country, such as annual inflation, annual GDP growth per capita, the development of the banking system and the development of the stock market. The results show a positive correlation between sustainability reporting, gender diversity on the board of directors and the value of the firm. This shows that companies adopting best management practices, building the trust of stakeholders through transparent ESG reports, and increasing the representation of women on boards of directors can significantly improve their market resilience. These results are consistent with the studies of Yu, M., ^{[15, pp. 289-307]}, Charaeva, M. V. ^{[2, pp. 109-120]}, and Abrahamyan, G. A. ^{[1, pp. 89-95]}

Ammer M., et al. ^{[1, pp. 1-21]} investigate the impact of sustainable development practices on the value of companies included in the TASI index of the Saudi Stock Exchange in the period from 2015 to 2019. Researchers use ESG dislocation indices (environmental, social and managerial aspects) as the main independent variable and apply the Tobin Q coefficient to measure the value of a company. The paper introduces independent directors on the boards of directors as a moderating variable to study their impact on the relationship between the declaration of environmental sustainability and the value of the company. Control variables include the size of the company (calculated by total assets), market capitalization, the ratio of total debt to total assets, and the risk of the company (measured by the beta coefficient, the volatility of the share price relative to the market index). The results indicate a strong and positive moderating effect of independent directors on the relationship between environmental sustainability practices and the company's value. This indicates that stakeholders perceive companies with reliable environmental reporting and a high presence of independent directors as more responsible and trusted in their environmental practices, which contributes to improving the value of the company.

Sustainable development is considered in the scientific literature through various approaches. One of the outstanding approaches is Corporate Social responsibility (CSR), which focuses on the company's responsibility for its social, environmental and economic consequences. Another important concept is Environmental, Social Responsibility and Management (ESG) factors, which focus on integrating environmental management, social responsibility and management practices into business operations. In addition, the Triple Income Line (TBL) approach includes measuring a company's productivity based on its social, environmental and economic contributions ^{[7, pp. 467-516; 13, pp. 7-8]}.

Some studies suggest that good environmental performance and disclosure have a positive effect on the value of a company, strengthening its reputation, market value and innovation, while other studies indicate a negative or negligible impact of environmental performance on the value of the company ^{[9, pp. 813-838]}.

Research shows that social factors, such as human capital management, affect the value of a firm. Garima S. et al. ^{[6, pp. 1-15]} analyze the impact of human capital on the value of a firm using data on non-financial Indian companies traded on the National Stock Exchange of India (NSE) obtained from the Prowess database for the period from 2001 to 2019. Two independent indicators are used in the study: the Tobin Q coefficient, defined as the ratio of the sum of market capitalization and total debt to total assets, and the human capital coefficient, defined as the ratio of total employee salaries to the company's sales volume. To ensure the reliability of the analysis, the authors control a number of factors, including: the size of the company (logarithm of sales), the growth rate of the company (annual sales growth rate), return on assets (earnings before interest and taxes (EBIT) / total assets), financial leverage (total debt / total assets), liquidity ratio (cash and short-term investments / total assets), R&D expenses (a fictitious variable indicating the presence of positive R&D expenses), stock turnover (total share turnover / market capitalization), dividend payout ratio (dividends paid / total assets) and materiality (net fixed assets / total assets). A dependent variable is the value of a firm, measured by discounting future cash flows and their growth rates. The results of the study revealed a positive relationship between human capital and the value of the firm, which demonstrates that human capital increases the value of the firm by optimizing the use of current growth opportunities, stimulating the creation of future growth opportunities and reducing volatility associated with the growth rate of the firm.

The study of corporate governance factors, such as the composition of the board of directors, and ethical practices on the value of the company is an urgent issue. Shuaibi S. et al. ^{[5, pp. 442-465]} study the relationship between social and ethical practices and firm value by analyzing 523 international companies included in the ESG index and headquartered in North America and Western Europe in the period from 2005 to 2019. Using a panel regression model with fixed effects, the authors explore how the strengths and weaknesses of social and ethical practices affect value creation in the stock market. Empirical results show that the strengths of social and ethical practices contribute positively to the value of a firm, with green innovation acting as a significant moderator. On the contrary, the study found that weaknesses in social and ethical practices have a negative impact on the value of the firm. These results are consistent with the research of Shklyaev, V. S. et al. ^{[3, pp. 554-556.]}. This study emphasizes the importance of integrating sustainable social and ethical practices into corporate strategies to increase the value of the firm, especially in the context of green innovations.

Disclosure of information plays a crucial role in shaping the value of a company. Jiao, Yu. ^{[8, pp. 647-676.]} examines the relationship between corporate disclosure ratings and various performance indicators for the period from 1982 to 1996. Using panel data, the author analyzes the relationship between information disclosure ratings as an independent variable and a variety of dependent performance indicators, including: - Return on shares of portfolios based on the company's disclosure rating, - Q-Tobin coefficient for measuring stock returns, - Return on sales, - Sales growth rate, - R&D expenses, - Size, - Age, - Price to Book value ratio (B/M), - Assets. The results show that disclosure ratings are significantly correlated with the value of the firm. It is noteworthy that the firms occupying the top positions in the information disclosure rating have a Tobin Q-coefficient value 35% higher than that of the firms occupying the bottom lines, which highlights the significant impact of corporate information disclosure on the firm's performance.

Integrated reporting (IR from English integrated report) plays an important role in increasing the level of information disclosure by offering a comprehensive and consistent approach to corporate reporting. It goes beyond traditional financial reporting, including information about the organization's strategy, management, performance and prospects in the context of the external environment, which allows for a more complete understanding of value creation over time. This holistic approach is achieved by focusing on six classes of capital:

1. Financial capital: Financial resources available to an organization for use in the production of goods or the provision of services, such as debts, equity and grants.

2. Production capital: Physical objects available to an organization for use in the production of goods or the provision of services, such as buildings, equipment, and infrastructure.

3. Intellectual capital: Organizational knowledge based on intangible assets, including intellectual property (e.g. patents, copyrights, software) and organizational capital (e.g. implicit knowledge, systems, procedures and protocols).

4. Human capital: People's competencies, abilities and experience, as well as their motivation to innovate and improve.

5. Social and network capital: Institutions and relationships within and between communities, stakeholder groups, and other networks, as well as the ability to share information to enhance individual and collective well-being.

6. Natural capital: All renewable and non-renewable natural resources and processes that provide goods or services that support the past, present or future prosperity of an organization, such as air, water, land, minerals and biodiversity.

IR helps organizations disclose information about their impact on various classes of capital, as well as how they manage these assets to create long-term value. Reporting on six types of capital allows organizations to provide stakeholders with a clearer understanding of how they create value over time. It also contributes to more informed decision-making by investors, improved relations with stakeholders, and increased transparency and accountability.

Research shows that integrated reporting increases the value of a firm. Velte, P. ^{[14, pp. 997-1061.]} studies the impact of integrated reporting (IR) on the value of a firm, comparing South Africa, where IR is mandatory, with other countries. The study analyzes the literature published between 2012 and 2020, with a focus on aspects such as corporate governance, board composition, ownership structure, and pressure with stakeholders.

A comprehensive review of the literature shows that the composition of the board of directors and pressure from stakeholders significantly improve the quality of integrated reports. In addition, the results indicate that the implementation and quality of integrated reporting are positively associated with improved valuation of the company.

Strategic planning plays a key role in increasing the value of the company. Miller, K. et al. 10, pp. 1649-1665. They evaluate previous research on the relationship between strategic planning and company performance, focusing on research conducted between 1985 and 1991. The authors use a multivariate regression model to estimate several independent variables, including company size, capital intensity relative to annual output, and the degree of unpredictability of internal business conditions. The results of the study show that strategic planning improves business performance, which implies a positive relationship between the degree of involvement of a corporation in strategic planning and its financial success.

An algorithm for increasing the market value of a corporation

Based on the literature discussed above, it is possible to develop a decision-making algorithm for the formation of company value, which takes into account the interaction between sustainable practices, transparent disclosure of information and strategic planning. According to the author, the algorithm should be built according to the following steps:

1. Analysis of the internal and external environment.

2. Creating a competitive advantage by defining a long-term corporate financial strategy.

3. Building up social capital by promoting a positive image of the company.

At the first stage of the implementation of the value addition algorithm, a SWOT analysis (ST E EP analysis) is performed to determine the internal and external environment.The analysis of the internal and external environment allows the manager to identify strengths and weaknesses, opportunities and threats to develop an effective value formation plan. Various tools can be used in this approach, including SWOT and STEEL analysis. This stage is necessary to develop a risk management strategy. Opportunities, such as the availability of constant cash flow, favorable consumer preferences for the company's products, as well as the provision of natural, financial or human resources, can be identified at this stage and used to generate corporate value.

At the second step of the algorithm, a competitive advantage is created by defining a long-term corporate financial strategy. A comprehensive understanding of both the internal and external environment allows us to identify areas in which the company has a competitive advantage in the market. For example, Gazprom benefits from exclusive rights to develop vast natural resources, which can increase its financial stability compared to competitors. Moreover, a large pool of well-trained personnel significantly contributes to the increase in the value of the company. Therefore, it is necessary to develop a strategic human capital management plan. In addition, the allocation of resources for research and development (R&D) is crucial for the development of intellectual capital.

Due to the comprehensive and long-term nature of the integrated report, it serves as an important tool for developing value creation strategies for various classes of capital, based on the strengths and opportunities available to individual firms.

The third stage of the algorithm is to create social capital by promoting a positive image of the company. To create sustainable value, firms need to invest in building a reliable brand image in order to establish trust among stakeholders. Key measures that can contribute to a positive brand image and improve the company's results are transparency in information disclosure, integration of environmental, social responsibility and corporate governance (ESG) aspects into business operations, as well as maintaining high ethical standards. By communicating a clear and consistent story about its activities, impact and future strategies, the company can strengthen its credibility and reliability in the eyes of investors, customers and the general public. This trust not only promotes closer relationships with stakeholders, but also enhances the reputation of the organization, its sustainability and, ultimately, its ability to support long-term value creation in a competitive market environment.

Conclusion

Sustainability plays a significant role in shaping the value of a company. Previous studies of the impact of ESG factors on market value show that the integration of ESG factors into business operations leads to an increase in the value of the company. In addition, transparency of information disclosure, through tools such as integrated reports, inspires confidence among stakeholders. To successfully execute and implement these plans, it is necessary to have a long-term corporate plan in order to strategically formulate the value of the company. Summarizing the results of the conducted research and striving to include the corporate financial decision-making process related to value creation, taking into account various aspects considered in this paper, such as investments in environmentally friendly projects, risk management and transparency of information disclosure, an algorithm was developed that, in our opinion, plays a crucial role in achieving the goal of creating the cost.

The algorithm is supposed to be built in the following stages:

1. Analysis of the internal and external environment.

2. Creating a competitive advantage by defining a long-term corporate financial strategy.

3. Building up social capital by promoting a positive image of the company.