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offered a cash dividend of €4.7 a share– a 15% increase on 2002. The ROACEwas 19% in 2003 – the highest levelamong its competitors.SiemensSiemens introducedEVA in 1997. “It requiresmanagers to radicallyrethink all businessdecisions and to forgetROI and measureprofitability with an eyeon the cost of capital,”said Dr Karl HermannBaumann, CFO back in1997. He credits theintroduction of EVAwith helping to turnSiemens around.Siemens has apositive economic valueadded (EVA) of €449million in fiscal 2003, animprovement of €768million compared to theprior year’s figure of anegative €319 million,excluding a €936million tax-free gain onthe sale of shares inInfineon. Including thisgain, EVA for fiscal 2002Reward ProcessesShareholders invest in people. Theyentrust people with their capital. Butshareholders have learnt to their costthat they can be too trusting.At the heart of the recent spate ofcorporate scandals are employeesmanipulating figures for their owngain. As financial incentives to achievetargets have become more attractivemore employees have massaged the figuresto achieve them.Until recently, granting stockoptions had potentially hazardousimplications for long-term success at acompany. Firstly, in a rising marketthey tend to reward management thatisn’t necessarily creating shareholdervalue and may even be destroying it.Secondly, they focus attention on theshort-term – the perception that valuehas been created becomes as importantas creating value. Hence, the incentiveto massage figures.How pay is tied to performance is athorny issue, but the structure offinancial incentives has a key part toplay in preventing such corporate misdemeanoursfrom happening again.“Using EVA and MVA allows less roomfor gaming,” says Kondragunta.Because EVA can be measured at anypoint in an organisation, bonuseslinked to EVA are a powerful influenceon corporate behaviour as you arealigning an employee’s interests to thelong-term value creation expected byinvestors. “The no improvements, nopay-off approach will incentiviseemployees to seek out truly profitablegrowth opportunities rather thaninvesting in wealth destroying ventures,”says Kondragunta. Acquiringcompanies at high premiums whilenever realising adequate returns on thecapital employed is a good example.EVA will capture the fact that profit isgrowing but not fast enough to compensatethe rise in capital invested.“We are all paid on the basis ofperformance with a long-term view,”says Mulva. “It is a broad-based incentivescheme based on how we performas a company and how we performonan individual basis.” Novartis sees noantagonism between a company’sshare price performance and internalincentive and bonus schemes. “A risingstock price will in the long run reflectthe value creation. There is no contradictionbetween the two.”The true value of a goodconversationValue-based management has beencredited with many things: increasedtransparency, lower capital costs, moreaccurate forecasting and improveddecision making. But Exxon Mobil’sMulva says that the real key toimproving shareholder value iscommunicating with shareholders,investors, and the market. In fact justabout everyone.“It is essential to communicate toour shareholders,” he says. “You can’tjust have one annual meeting and oneannual report.” Exxon has increased itswas a positive €617million.“Shareholder value isabout a strongperformance orientedculture and creating asustainable economicvalue – not only on aday-to-day-level – but ona sustainable basis inthe long term,” saysSabine Kromer,corporatecommunications officerat Siemens. “A centralaim for Siemens, as itwas defined by our CEOMr. v. Pierer in thecompanywide Ten-PointProgram in the year2000, is to generate apositive economic valueadded (EVA) and toimprove it further.“We see innovationas a main driver forshareholder value in ourdaily business,” saysKromer. “At thebeginning of fiscal 2004we decided toconcentrate on threecompany-wideprograms: innovation,customers focus andglobal competitiveness.As part of ourinnovation program, wewill focus more ondeveloping trendsettingtechnologies and crossgrouptechnologyplatforms. With ourcustomer focus programwe intend tosubstantially boostgrowth, but not at theexpense of earnings.Global competitivenessto us means that weplan to expand ourpresence at lower costlocations. This meanspurchasing,manufacturing,software developmentand administrativeservices.”face-to-face public meetings and says ithas increased its output of informationten-fold, as its website testifies. If communicationis the key, then the CFOs atcorporates we contacted are doing asterling job. The CFOs at Total, Nokia,Roche and Novartis were on trips gladhandingshareholders when CF calledABOUT STERN STEWARTStern Stewart is a global consulting firmthat specializes in helping clientcompanies in the measurement andcreation of shareholder wealth through theapplication of tools based on modernfinancial theory. The company pioneeredthe development of its proprietary EVA®(Economic Value Added) framework,which offers a consistent approach tosetting goals and measuring performance,communicating with investors, evaluatingstrategies, allocating capital, valuingacquisitions, and determining incentivebonuses that make managers think likeowners.corporatefinancemag.com March 2004 cf 27