S. David Young
Professor of Accounting and Control
The value-based management movement is based on two assumptions. The first is that the main aim of any business in a market economy is to maximize shareholder value. The second is that markets are too competitive for companies to create such value by accident. They must plan for it.And that means having the right culture, systems, and processes in place so managers make decisions in ways that deliver better returns to shareholders. At the very least corporate functions must be informed by value-based thinking.This includes strategic planning, capital allocation, operating budgets, performance measurement, incentive compensation, and corporate communication. Economic value added, or EVA, is a tool for achieving this. EVA is a measure of performance, but its uses extend further. It is also an instrument for changing managerial behaviour. Implementing value-based principles requires acceptance and understanding among all managers, who not only must appreciate why value creation is so important but also must grasp the fundamental concepts underlying value creation.One of the great virtues of EVA is that it makes sound finance theory accessible, so that operating managers, including those with no background or experience in accounting or finance, can incorporate insights from these disciplines into the way they run their businesses.