The EVA Challenge: Implementing Value-Added Change in an ...

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234 The EVA Challenge he was correct. Reading the works of Professor Gary Becker helped me focus on the important issue of incentives in determining human behavior. Milton Friedman provided the laboratory thinking that was necessary to push the intellectual aspects of our ideas no matter where they took us and Merton H. Miller was the most significant contributor to the basic ideas on what determines the value of the firm. As I have told my students in classes at Columbia, Carnegie- Mellon, the University of Michigan, the University of Rochester, the London Business School, and the University of Witwatersrand in Johannesburg, it was not just the seminal paper by Franco Modigliani and Merton Miller in 1958 on cost capital and capital structure that was so important; but rather the paper published in October 1961 in the Journal of Business titled, “Dividend Policy, Growth, and the Valuation of Shares,” Section 2, and footnote 15 in Section 3, which provided the bases for lengthy discussions with Professor Miller concerning what the market really capitalizes. It was he who convinced me to ask the right questions, such as, why intangible assets are written off immediately in the accounting framework, but provide long-term value in the economic model of the firm. His classes were among the most stimulating. Imagine classmates that included Marshall Blume, Michael Jensen, Richard Roll, and Myron Scholes. Each of these economists became my teachers without knowing it, either by listening to them in class discussions, or by reading their path-breaking papers over the next twenty-five years. Such was the environment at the University of Chicago and in Merton Miller’s classes. No doubt Michael Jensen played a greater roll in the formulation of the EVA practices and design structure because of his insights that began with his pioneering “agency theory” (coauthored with the late William Meckling), where we were warned that management could act in interests other than shareholders, and thus shareholders would need to impose upon themselves the costs of
Acknowledgments 235 monitoring management behavior, especially employing compensation structures that more closely align management and shareholder interests. His paper on free cash flow in the mid-1980s certainly demonstrated the danger of hoarding surplus assets in the firm and the threat to shareholder interest should such assets be used to cross-subsidize poor returning projects. His Harvard Business Review paper in 1989, “Eclipse of the Public Corporation,” caused considerable support and conflict at Stern Stewart. Several of our professional staff felt his observations were correct and served as a fundamental stimulus to my colleague’s book, The Quest for Value, in which Bennett Stewart suggests using high-debt ratios, possibly down deep into the firm (perhaps even in phantom form), in order to extract value and to encourage minimum waste. Others in the firm believed that Professor Jensen’s concerns could be overcome by contractually obligating the firm in carefully designed incentive structures that would expunge the surplus to shareholders and would activate all employees, not just management, to become value-change agents. Firms in mature, smokestack industries that might have been given up for dead would prove under the latter format to be merely dormant and, with the proper EVA motivation and mind-set changes, truly tremendous value-enhancing energies would be released. These are the real stories at Briggs & Stratton, Herman Miller, and SPX, to mention only the most obvious. I most certainly thank Brian Walker at Herman Miller, Inc., for his commitment and drive to make EVA work in his firm, where a Scanlon approach had been used and became quite popular. John Blystone, a true intellect from General Electric, rescued SPX, where EVA had yet to be implemented. Upon his arrival at SPX, John recognized the critical contribution EVA could make. And across national boundaries, success has come at Siemens in Munich, Tate & Lyle in London, Orkla in Oslo, Lafarge in Paris, each with chief executive officers and finance directors who recognize the sustainable
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The EVA Challenge Implementing Valu
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Advance Comments on The EVA Challen
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This book is printed on acid-free p
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Chapter 1 The Problem Back in the e
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The Problem 3 for systems to get ma
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The Problem 5 for a building, but i
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The Problem 7 Not only does EPS dis
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The Problem 9 significant and growi
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The Problem 11 admiring articles in
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The Problem 13 few years. Forstmann
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Chapter 2 The Solution What is Econ
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The Solution 17 There is a signific
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The Solution 19 than projections. E
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The Solution 21 (R&D) costs, (2) ad
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The Solution 23 capital, Tate & Lyl
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The Solution 25 is usually the chie
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Chapter 3 The Need for a Winning St
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The Need for a Winning Strategy and
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Chapter 4 The Road Map to Value Cre
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The Road Map to Value Creation 53 T
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The Road Map to Value Creation 61 b
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Value Creation Capital Structure
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The Road Map to Value Creation 69 c
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Chapter 5 The Changes Wrought by EV
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The Changes Wrought by EVA 73 and t
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The Changes Wrought by EVA 75 all d
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The Changes Wrought by EVA 77 Even
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The Changes Wrought by EVA 79 Reduc
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The Changes Wrought by EVA 81 hardl
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The Changes Wrought by EVA 83 prese
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86 The EVA Challenge mechanical cou
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88 The EVA Challenge company fired
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90 The EVA Challenge skirmishes of
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92 The EVA Challenge but the reduct
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94 The EVA Challenge We now move on
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96 The EVA Challenge employees, man
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98 The EVA Challenge 3,500. The thr
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100 The EVA Challenge with economic
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102 The EVA Challenge November 1998
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104 The EVA Challenge their drawbac
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106 The EVA Challenge to establish
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108 The EVA Challenge It is helpful
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110 The EVA Challenge Managing for
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112 The EVA Challenge After a coffe
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114 The EVA Challenge EVA 101, the
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116 The EVA Challenge facilitator t
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118 The EVA Challenge The classroom
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Herman Miller—Continental North A
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122 The EVA Challenge in an organiz
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124 The EVA Challenge In the modern
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126 The EVA Challenge efficiencies
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128 The EVA Challenge A company tha
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130 The EVA Challenge units and imp
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132 The EVA Challenge Witter’s re
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134 The EVA Challenge $70.8125 eigh
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136 The EVA Challenge companies wer
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138 The EVA Challenge design, manuf
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140 The EVA Challenge you can lose
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142 The EVA Challenge Allen-Bradley
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144 The EVA Challenge Disadvantages
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Chapter 9 EVA Incentives We revert
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EVA Incentives 149 EVA incentive pl
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EVA Incentives 151 For a typical di
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EVA Incentives 153 bonus by 10, div
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EVA Incentives 155 these approaches
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EVA Incentives 157 quarters of the
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Chapter 10 How EVA Can Fail What mo
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How EVA Can Fail 161 created by a d
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How EVA Can Fail 163 Stern Stewart
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How EVA Can Fail 165 pay. Monetary
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Chapter 11 New Frontiers: Real Opti
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New Frontiers: Real Options and For
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180 The EVA Challenge conflict betw
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182 The EVA Challenge Question 2. W
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Page 217 and 218: Epilogue EVA and the “New Economy
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Page 241: Acknowledgments This project has be
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Page 254 and 255: 246 Index Competitive positions (Po
Page 256 and 257: 248 Index Incentive plans based on
Page 258: 250 Index Takeover artists, 11 Tate
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