The EVA Challenge: Implementing Value Added Change in an Organization

Rating:
Summary: Clear and Relevant
Review: A very useful book for equity analysis professionals (and, in general, anyone involved in business of any kind). The book is both highly clear and highly relevant. The author gets to the heart of the key drivers behind equity value and dispels many widely held fallacies. Examples are clear, concise and instructive. The index is well constructed and useful. This latest book by Joel Stern is a valuable addition to the EVA literature.

Rating:
Summary: Highly Recommended!
Review: Authors Joel Stern and John Shiely advocate a total revolution in the way companies are valued and measured. They make a convincing case for using EVA ("Economic Value Added") as the primary measure of corporate performance. The authors argue that the SEC's yardstick for corporate reporting, the "Generally Accepted Accounting Procedures" (GAAP), was designed to protect lenders by depicting a company's liquidation value. As such, GAAP provides an overly conservative and only marginally accurate picture of financial health. EVA principles - at least according to the consultants who advise companies on using them - evaluate intangible assets more realistically and correspond more closely to stock market performance. We from getAbstract recommend this book to executives who seek improved corporate financial and market performance, and to investors interested in understanding how value is created and maintained.

Rating:
Summary: EVA from a Senior Management Perspective
Review: EVA Challenge was OK. It is more geared towards senior managers who are thinking about EVA as a model for their companies. In that regard, this books does a fine job.

I was hoping the book would deal with more of the matamatics associated with defining EVA in relation to various projects and business decisions. This book contailed very little information in this regard.

Rating:
Summary: THE big picture of EVA concept
Review: Joel Stern masters the art of explaining EVA in a simple manner. Co-authored by John Shiely, sharing his on-the-job experience using EVA at Briggs & Stratton, the book looks at strategic considerations of why to use EVA and how it is better than other performance measures and financial management systems to enhance shareholder value. I especially like the "How EVA can Fail" and the "25 Questions" chapters because they go deep into issues sometimes overlooked when one thinks about Value Based Management implementation.

Rating:
Summary: Aligning Shareholder and Manager Interests
Review: One of the most difficult questions to answer is what a company's worth is. Two developments in American Capitalism have contributed to the question's complexity. First, shareholders have divorced themselves from the corporations operation, leaving the task to professional managers.

Second, generally accepted accounting principles do not align expenses with benefits, distorting economic reality. As a result, investors who want to compare the cash they can take out of a company with the cash they have invested are hampered.

The authors argue Economic Value Added (EVA) is a true measure of a company's economic performance, in addition to being a strategy for creating shareholder value. Properly implemented, they state, EVA frees the measurement of corporate performance from the vagaries of accounting principles and gives both shareholders and management a clear picture of the value the company creates.

EVA is the profit that remains after deducting the cost of the capital invested to generate that profit or EVA = Net Operating Profit After-Tax minus capital charge. Effectively implemented, the tool becomes the basis for an incentive plan that rewards managers for actions that increase shareholder returns and vice versa.

John S. Shiely, president of Briggs and Stratton and co-author of the book, notes this strategy provided the foundation of his company's turnaround. In 1989, the world's largest producer of air-cooled engines had an EVA of negative $62 million based on $1.3 billion in sales. By re-organizing and focusing its strategy while developing its EVA program, the company staged a dramatic turnaround. By 1999, it reported a record positive EVA of $50.9 million. Shareholders, who bought $100 worth of stock at the beginning of the program, saw it increase in value to $673 in 1999.

The authors claim EVA is ideal for knowledge-based companies making heavy infrastructure investments today for any anticipated return later. EVA treats cash outlays that represent investments as capital rather than expenses. The capital in these knowledge based industries consists of research, development, marketing, advertising and start-up costs. Accounts view these expenditures as expenses, but it is realistic to capitalize them and amortize them over their useful lives.

Rating:
Summary: Aligning Shareholder and Manager Interests
Review: One of the most difficult questions to answer is what a company's worth is. Two developments in American Capitalism have contributed to the question's complexity. First, shareholders have divorced themselves from the corporations operation, leaving the task to professional managers.

Second, generally accepted accounting principles do not align expenses with benefits, distorting economic reality. As a result, investors who want to compare the cash they can take out of a company with the cash they have invested are hampered.

The authors argue Economic Value Added (EVA) is a true measure of a company's economic performance, in addition to being a strategy for creating shareholder value. Properly implemented, they state, EVA frees the measurement of corporate performance from the vagaries of accounting principles and gives both shareholders and management a clear picture of the value the company creates.

EVA is the profit that remains after deducting the cost of the capital invested to generate that profit or EVA = Net Operating Profit After-Tax minus capital charge. Effectively implemented, the tool becomes the basis for an incentive plan that rewards managers for actions that increase shareholder returns and vice versa.

John S. Shiely, president of Briggs and Stratton and co-author of the book, notes this strategy provided the foundation of his company's turnaround. In 1989, the world's largest producer of air-cooled engines had an EVA of negative $62 million based on $1.3 billion in sales. By re-organizing and focusing its strategy while developing its EVA program, the company staged a dramatic turnaround. By 1999, it reported a record positive EVA of $50.9 million. Shareholders, who bought $100 worth of stock at the beginning of the program, saw it increase in value to $673 in 1999.

The authors claim EVA is ideal for knowledge-based companies making heavy infrastructure investments today for any anticipated return later. EVA treats cash outlays that represent investments as capital rather than expenses. The capital in these knowledge based industries consists of research, development, marketing, advertising and start-up costs. Accounts view these expenditures as expenses, but it is realistic to capitalize them and amortize them over their useful lives.

Rating:
Summary: EVA from a Senior Management Perspective
Review: Perhaps you have already read Ehrbar's EVA. He quite correctly points out that there can be many challenges to implementing a program based on EVA principles. He characterizes it as "a superior measure of corporate performance, one that is tied more directly to share than any other performance measure, by charging profit for the cost of all the capital a company employs, including equity."

More specifically:

"It is the framework for a complete financial management and incentive compensation system that can guide every decision a company makes...that can transform corporate culture, that can
improve the working lives of everyone in an organization by making them more successful, and that can help them produce greater wealth for shareholders, customers, and themselves."

Stern and Shiely (with Irwin Ross) focus on the specific challenges which will probably be encountered when initiates are taken to implement value-added change in an organization. They suggest all manner of strategies and tactics to achieve that objective, agreeing with O'Toole's key points in Leading Change when he analyzes what he calls "the ideology of comfort and the tyranny of custom."

For the authors of this book, there have been two major developments in American capitalism which explain why "the opportunity cost of capital" has been miscalculated: "(1) the split between ownership and control of publicly held corporations and (2) the widespread acceptance of accounting measurements [i.e. GAAP] to gauge corporate value, a purpose for which they were never intended." Having defined and then analyzed various problems in Chapter 1, the authors proceed into 12 more chapters whose titles suggest their focal points: The Solution, The Need for a Winning Strategy and Organization, The Road Map to Value Creation, The Changes wrought by EVA, Extending EVA to the Shop Floor [an absolute imperative], Getting the Message Out: Training and Communications, EVA and Acquisitions, EVA Incentives, How EVA Can Fail [and it does...the authors explain why], New Frontiers: real Options and Forward-Looking Eva, 25 Questions [which must be answered fully or forget about EVA], and finally, a Recipe for Success. The book then provides its own value-added benefit: an Epilogue written by Gregory V. Milano which discusses EVA and the "New Economy."

Briefly, I would like to comment on Chapter 13 which offers a "Recipe for Success." The authors introduce and explain six key factors. Having already acknowledged various forms of resistance and resentment which implementation of EVA principles may well encounter, the authors understand full well that these factors may offer the promise of success but by no means guarantee it. They are:

1. "The company must have a viable business strategy and appropriate organizational architecture before EVA can boost performance."

2. To achieve full potential of EVA, a company should install all of EVA's components -- a measurement system, a management system, and an incentive system."

3. An EVA incentive plan is essential, and it should reach as far down in the organization as possible."

4. "A comprehensive training program is equally essential. It should not be limited to top executives but should infiltrate all managerial levels and, ideally, reach down to the shop floor."

5. "The EVA program must have the full and fervent backing of the CEO, who should chair all the all-important steering committee that puts EVA in place."

6. "The CFO and/or the controller should be equally committed. Because they have to deal simultaneously with standard accounting practices, these specialists may have an even greater problem focusing on value creation than a CEO newly introduced to EVA."

Stern and Shiely (with Ross) offer a comprehensive, cohesive, and cost-effective program which, after appropriate modification, can be of substantial benefit to almost any organization, regardless of its size or nature. Milano's insights are especially important in 2001 as so many organizations are attempting (with mixed success) to reconcile the basic principles of the so-called "Old" and "New" economies. (I hope they or Ehrbar next write a book which explains how EVA can be of greatest benefit to privately-owned smaller companies.) Drucker was right: "Until a company returns a profit that is greater than its cost of capital, it operates at a loss." We have all manner of mechanisms by which to determine the exact net worth of an individual executive. Properly understood, EVA principles can do the same for an organization IF if those who lead that organization are guided and informed by the aforementioned "six key factors." If you share my high regard for this book as well as Ehrbar's, you are urged to check out Fitz-enz's The ROI of Human Capital.

Rating:
Summary: EVA...She's a Beauty
Review: The first two chapters, just 26 pages, do a masterful job of explaining the "what" and "why" of EVA. The rest of the book tells the "how". The real life experiences of companies like Briggs & Stratton and Herman Miller,Inc make it all credible. The book is fast-reading and non-financial personnel will be delighted with the manner in which the subject is presented.