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The EVA Challenge
Book

The EVA Challenge

Implementing Value-Added Change in an Organization

Joel M. Stern, John S. Shiely and Irwin Ross
Wiley, 2001
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Editorial Rating

8

Qualities

  • Innovative
  • Applicable

Recommendation

Authors Joel Stern and John Shiely advocate a total revolution in the way companies are valued and measured. They make a convincing case for using EVA ("Economic Value Added") as the primary measure of corporate performance. The authors argue that the SEC’s yardstick for corporate reporting, the "Generally Accepted Accounting Procedures" (GAAP), was designed to protect lenders by depicting a company’s liquidation value. As such, GAAP provides an overly conservative and only marginally accurate picture of financial health. EVA principles - at least according to the consultants who advise companies on using them - evaluate intangible assets more realistically and correspond more closely to stock market performance. getAbstract.com recommends this book to executives who seek improved corporate financial and market performance, and to investors interested in understanding how value is created and maintained.

Summary

The Problem

What determines a company’s value? An old man with a mom-and-pop grocery store answers by pointing to the cigar box where he keeps his cash, saying, "If the lid is rising during the day, it means we’re doing fine." As measures go, this may be simplistic, but it says it all. To turn a profit, you have to bring money in faster than it goes out. That’s the only real value.

However, it’s not easy to figure out the value of a corporation. The reason is rooted in the stock market abuses of the 1920s and 1930s, when you virtually had to be an insider to make a profit, and conventional investors were pigeons. That situation led to the development of Generally Accepted Accounting Principles (GAAP), and to the Securities and Exchange Commission (SEC) requirements that all publicly traded companies adhere to these principles.

Unfortunately, over time, GAAP has come to be used for the actual valuation of companies: for annual reports, for financial review, for determining corporations’ future plans, for many purposes to which they may or may not be suited. GAAP has evolved over the years to produce conservative results that are designed to satisfy lenders that...

About the Authors

Joel M. Stern  , managing partner of Stern Stewart & Co., is a widely published writer and the financial policy columnist for the Sunday Times of London. He serves on the faculties of five graduate business schools worldwide. John S. Shiely, president of Briggs & Stratton, was a tax accountant with Arthur Anderson before he became a lawyer. He joined Briggs & Stratton as general counsel in 1986. Writer Irwin Ross  (whom Stern retained to help write this book) was a roving editor for Reader’s Digest. He has written for many magazines, including Fortune and Harper’s, and is a regular contributor to EVAngelist. He has written a number of books, including The Loneliest Campaign, The Image Merchants and Shady Business.

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