Implementation of the Value Based Management

On August 28th 2003, the Management Board of PKN ORLEN SA presented to the Supervisory Board a programme of doubling the economic value of the Company over three years. This ambitious goal is to be achieved thanks to Value Based Management (VBM).

"Value Based Management is not only a matter of numbers. It is a change of the Company's philosophy of functioning. The first challenge to be met in the implementation of the VBM programme is to eradicate the old ways of thinking. That is why at the start of the implementation of the programme, we firmly undertake to generate a satisfactory shareholders value," states Zbigniew Wróbel, President of PKN ORLEN's Management Board.

The main objective of the Value Based Management programme is to direct PKN ORLEN's strategy towards creating value for shareholders. The principal purpose of the project is to establish a sound platform for the performance of strategic goals, to increase the financial potential and operational efficiency, to enhance PKN ORLEN's competitiveness in Poland and in the region, and to strengthen competence and motivation of the management throughout the Group.

The essence of the programme is that the management systems are based on Shareholders Value Added (SVA), calculated as the excess of after-tax operating result over the cost of employed capital. The cost of capital includes not only cost of debt but also the rate of return required by the shareholders contributing equity to the Company. The program is implemented in co-operation with Andersen Business Consulting and includes elements of the cost-cutting programme realised in co-operation with McKinsey.

The implementation of the Value Based Management at PKN ORLEN involves: " setting several-year deadlines for ambitious but feasible strategic objectives for the Company,
translating the objectives related to the creation of the Company value into specific tasks for organisational units and for the managers in charge of the units,
introducing a key performance indicators (KPI) system to monitor the performance of the strategy based on the Balanced Scorecard,
incorporating standards based on SVA and cost of capital into the main systems of the Company's management: an incentive system, operational planning, accounting, investments evaluation,
creating a system for communicating the progress of value creation to the shareholders.
The value creation at PKN ORLEN will focus essentially on three segments. In the retail segment, SVA is to increase by PLN 231m thanks to reorganisation and modernisation, combined with a cost-cutting programme and actions aimed at enhancing sales efficiency. The target for SVA in production, logistics and wholesale is a PLN 510m increase, to be achieved mainly through the introduction of a new sales and marketing strategy, implementation of a margin optimisation system, enhancement of the processing efficiency, optimal utilisation of distillation capacity and cost savings. The restructuring programme and costs saving at the Group companies should improve SVA by PLN 48m. The strategy of Value Based Management is inseparably connected with generating Shareholders Value Added. The Management Board, tapping on the experience of the Western corporations, intends to go on to the implementation phase of the value creation strategy through defining specific goals for each of the directors. The whole Company's management will be involved in the implementation of particular elements of the strategy, by breaking down general objectives into constituent ones using the value trees developed at the Company. Each decision relating to the Company will be assessed in the context of the ratios which have a bearing on the increase in the Company value. In order to achieve a new level of corporate culture, value creation trainings will be conducted for PKN ORLEN employees. The Management Board hopes to form teams oriented towards an effective implementation of the activities comprising the strategy.
Currently work is underway to develop an incentive programme for PKN ORLEN employees, which will support the creation of the Company value. "According to research, the success of value creation projects depends in 20% on numbers and in 80% on the employees working for a given company. With this in mind, we place particular emphasis on establishing appropriate relations with our managers," Zbigniew Wróbel, President of PKN ORLEN concludes the description of the whole project.