Best–Practice EVA: The Definitive Guide to Measuring and Maximizing Shareholder Value

Praise for Best-Practice EVA "This is the best-ever guide to using EVA—the most valuable and important corporate finance tool of the past thirty years." —Geoff Colvin, Senior Editor at Large, Fortune "We're implementing Best-Practice EVA with EVA Dimensions; I expect that the tools and metrics will become quite common in our vernacular at PepsiCo. The new EVA ratios are a helpful way to dissect EVA and help the organization focus on the opportunities." —Hugh F. Johnston, Executive Vice President and Chief Financial Officer, PepsiCo "Throughout my career, I have been intensely interested in how value is created, and how financial leaders and innovations can play a critical role. Best-Practice EVA is as good a guide as I have seen on the subject. It is chock-full of practical techniques that any chief financial leader can use to help improve corporate performance and create owner wealth." —Jim Lawrence, Chairman, Rothschild North America and Co-Head of Global Investment Banking, Rothschild Group, and former CFO of Unilever and General Mills " Best-Practice EVA provides practical tools for my everyday world of equity analysis—particularly EVA Margin and EVA Momentum, two universally scalable metrics that provide insight into how CEO strategies and shifts in the competitive landscape change shareholder value." —Joe Joseph, Portfolio Manager, Putnam Investments "This book should be the go-to guide for executives seeking to improve how they set objectives, align strategy efforts with value creation, and ensure crystal-clear success measurement. Business unit leaders will like the simple and practical approaches that clearly link EVA with actionable operating levers. The book is filled with examples that vividly bring the concepts to life. I recommend it highly." —Fareed A. Khan, Chief Financial Officer, United Stationers "Bennett Stewart has liberated EVA for all. His new ratio-based version is a real innovation that takes the perceived complexity out of EVA and enables an organization to connect all its efforts to the creation of value . . . from the sales floor to the boardroom. I like it. We'll use it." —Michael Archbold, CEO, Talbots, and former CFO of Vitamin Shoppe and AutoZone "I believe EVA can be one of the tools that help corporate boards to safeguard and enhance shareholder value. Bennett Stewart exposes the flaws in conventional financial ratios—pitfalls every director should understand. He cleverly explains the nuts and bolts of EVA and how board members can use it to rate business plans, set targets, judge and benchmark performance and even to value acquisition candidates on their real financial merits. A recommended read!" —T. K. Kerstetter, Chairman, Corporate Board Member "Bennett Stewart has written an insightful and provocative reexamination of the EVA concept that he pioneered two decades ago. This is an important read for those interested in executive incentive structure and the practical applications of finance theory." — Charles M. Elson, Edgar S. Woolard Jr., Chair in Corporate Governance, Director, John L. Weinberg Center for Corporate Governance " Best-Practice EVA provides fresh insights into the power of EVA—the creative and important metric developed by Bennett Stewart. This is must-reading for anyone interested in increasing shareholder value." —Ira Kay, Managing Partner, Pay Governance

Preface ix CHAPTER 1 EVA 101 1 CHAPTER 2 EVA and Value 19 CHAPTER 3 Accounting for Value 47 CHAPTER 4 What’s Wrong with RONA? 85 CHAPTER 5 The New EVA Ratio Metrics 99 CHAPTER 6 EVA Margin 123 CHAPTER 7 Setting EVA Targets 157 CHAPTER 8 Put Momentum into Planning 191 CHAPTER 9 Dividing Multiples into Good and Bad 217 CHAPTER 10 Put EVA into Capital Decisions and Acquisitions 223 CHAPTER 11 EVA and the Buy Side 245 CHAPTER 12 Become a Best–Practice EVA Company 273 APPENDIX A The Best–Practice EVA Software Toolkit 287 APPENDIX B Corrective Accounting Adjustments 291 APPENDIX C Accounting for Corporate Charges in Detail 295 Glossary 299 About the Author 313 Index 315

G. Bennett Stewart III is chairman and chief executive of EVA Dimensions LLC, a financial technology firm that provides software, data, and training and support programs to enable its corporate clients to test and implement Best-Practice EVA. The firm also offers EVA-based equity research services to help institutional fund managers make better informed buy-sell decisions and generate excess returns. Mr. Stewart was a founding partner of Stern Stewart & Co., the EVA consulting firm, from 1982 to 2006. He left to form EVA Dimensions by acquiring assets from Stern Stewart, including the EVA trademark for those assets. Mr. Stewart's other book is The Quest for Value (1991), which has been described as "the definitive management guide to EVA." A globally recognized expert in the field of value-based performance management, incentive compensation, and accounting for value, he is a frequent speaker and author of articles on topics in those fields.