Using EVA to Drive Performance Improvement
Economic value added (EVA) models, if well implemented, will encourage managers to act like owners and consider their decisions in the context of whether they will increase shareholders’ wealth; enable managers to see which business segments and product lines add value and which don’t; focus managers on the balance sheet as well as the income statement; and provide a reward mechanism that compensates managers for increasing shareholder value. Accounting profits have proved time and again to be a poor indicator of future success (remember Enron, WorldCom and the recent banking crash?). EVA goes a long way toward meeting some of the criticisms of published accounting information. It attempts to turn accounting profits into a rough measure of “free cash flow” that many people believe more closely correlates with the rise and fall of “shareholder value”. But, as this paper exlains, its concepts are challenging and difficult for some managers to translate into operational decisions.