EVA and Value-Based Management: A Practical Guide to Implementation by S. David Young

by S. David Young

Economic Value Added (EVA) and Value Based Management (VBM) are today's hottest management buzzwords. But written information has often been biased and clouded by the authors' hidden agendas. EVA and Value-Based Management is the first book to unflinchingly discuss the pros and cons of EVA and VBM. Covering both implementation and conceptual issues,with a strong emphasis on performance measurement,value drivers,and management compensation,it allows readers to come to their own informed conclusions. Real-world guidelines for implementing EVAToday's Most Comprehensive and Unbiased Evaluation of Value-Based Management and EVAEconomic Value Added (EVA) and Value Based Management (VBM),despite persistent claims to the contrary,are not magic wands,guaranteeing instant success. Instead,they are a set of management tools—powerful tools,to be sure,proven to work in case after case—for creating and augmenting shareholder value.And as with any tools,users will achieve the greatest success only by learning and understanding both their strengths and weaknesses. EVA and Value Based Management is the first book to fully explain all sides of EVA and VBM,and cover the critical factors in harnessing EVA and VBM to build shareholder value. It provides in-depth coverage of the key steps in implementing EVA, Determining your cost of capital * Using accounting adjustments to make EVA a better measure of performance* Identifying value drivers to guide performance improvement*Tying management compensation to EVAThe sustained creation of shareholder value doesn't happen by accident—it happens because companies plan for it. Let EVA andValue Based Management give you the clear,concise,and up-to-date information you need on EVA and VBM—what they are,why they work,and how they can work for you—and then show you how to use that information to reach your own informed conclusions.Managers—even those from just a quarter century ago—would have a difficult time recognizing today's business climate. In the new world order,companies must prove their worth in both commercial markets (making and selling the best products and ideas) and capital markets (creating value through optimal use of all available resources,all the time). Those that fall behind in either pursuit will find the climb to market leadership difficult if not impossible.EVA and Value Based Management is the first book to frankly and comprehensively discuss the pros and cons of Economic Value Added (EVA) and Value Based Management (VBM)—proven in numerous cases to increase shareholder value while strengthening organizations in which they are successfully implemented. Written by award-winning INSEAD professor S. David Young and leading management expert Stephen F. O'Byrne,it covers both conceptual and implementation issues,placing a strong emphasis on performance measurement,value drivers,and management compensation.Look to EVA and Value Based Management A clear explanation of the concepts behind EVA and VBM* A highly practical guide to implementing EVA for performance measurement and incentive compensation,with dozens of real world examples* An honest assessment of the pros and cons of EVA and competing value-based approaches* A frank discussion of the company characteristics that help or hinder successful EVA implementation,helping you to decide whether EVA and VBM are right for your organization.Many prominent corporate leaders have long proclaimed—and,even more significant,put to the real-world test—the benefits of EVA. In EVA and Value Based Management,management experts S. David Young and Stephen F. O'Byrne define and discuss EVA,then present a simple,easy-to-understand approach for determining how it will succeed in your organization. The result is an all-inclusive,no-holds-barred overview of value-based management and EVA—and today's most valuable,practical guidebook for implementing a highly effective,performance driven management program.

Hardcover

First published November 22, 2000

Reviews

[InvestingByTheBooks.com · Rating 3 out of 5]

It’s with mixed feelings I review this book almost a decade and a half after its publication. On the one hand the central insight of EVA, Economic Value Added, is as relevant as ever and unfortunately is still under-appreciated amongst corporate leaders. On the other hand the book hasn’t aged well, written as it is during the days of the Technology- bubble. S. David Young is a Professor of Accounting & Control at INSEAD specializing in Value Based Management and executive compensation, while Stephen F. O'Byrne who is the President and co-founder of the consultancy Shareholder Value Advisors Inc. is an old employee of Stern Stewart & Co. Hence, both were firmly placed in the midst of the shareholder value revolution in corporate management theory during the 1990’s.

The simple but still powerful basic premise of EVA is that companies’ main purpose is to create shareholder value and that this is done by investing capital with a higher return than the cost of the capital. The piece of the puzzle that is missed by many is that the most expensive capital is the one that appears to have no cost - that is the equity capital. EVA is a method to measure the value creation and to present it as a monetary number. Measures that instead turn out percentages have the pedagogical disadvantage of discouraging value-enhancing investments that lower the previous overall level of return of capital. On the other hand, any measure that takes the cost of all capital into account would, if used, hinder much of the unattractive investments done simply because management teams want to peruse growth and internally generated funds seam to be cash just sloshing around without any claims on it or cost attached to it. Corporate owners beg to differ...

I very much enjoyed a short paragraph written on how financial strategy (leverage) ties to value creation. Increased leverage increases the tax shield of the company as interest payments are tax deductible and therefore the present value of the tax shield grows, as does the value of the company. This is only applicable up to a certain point where the counterbalancing risk of financial distress gives a present value of distress costs that is larger than the previous mentioned gain. I would add the strategic option value of having cash at hand at times of other companies’ hardship into the equation. The chapter on Value Drivers, i.e. on the factors that increase return on capital, turns from good to excellent when it starts to discuss non- financial drivers and makes explicit ties to the Balance Scorecard Model. This bridge between corporate strategy and creation of shareholder value is an area too often neglected by both financial and management literature.

Unfortunately there is also an, in retrospect, rather petty chapter called The Metric Wars. Here the authors criticize rivaling value based measures and especially so an early version of HOLT. It feels like something out of Monty Python’s Life of Brian where the People's Front of Judea ferociously fight Judean People's Front instead of fighting the Romans. I also find the chapters of management compensation long, tedious and reflecting the zeitgeist of an era when the corporate world was intoxicated with the combination of options and the ever increasing prices on a stock market that was seen as always being correct. At times it almost gets parodic, as when the authors try to justify that the market - at the time - values companies as if 99 percent of them have positive EVA when in fact only 61 percent had. This is explained with accounting adjustments, risk premia arguments and financial technicalities. The possibility of an overvalued market never really comes up!

After the two financial crashes in the first decade of the 2000’s EVA has fallen from grace. Perhaps this blind faith in market prices always being right is one of the reasons that the sound parts of the shareholder value revolution are now being so out of favor? Why should there be something to learn from people proven so wrong? Well, there is.