Roadblocks to the embrace of EVA.

Author:STERN, JOEL M.
Position:Economic value added
 
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Only an enthusiastic CEO, determined to impose EVA, can overcome an uncongenial corporate culture and other hazards that would subvert the program's implementation

WHAT MOTIVATED that CEO to announce his retirement a year in advance? Perhaps he wanted to assure would-be successors that he was not planning to stay indefinitely. Whatever his motives, his premature announcement was for a time a body blow to the EVA implementation that had been underway for six months; in another three months, the EVA incentive system was supposed to go into effect. Nonetheless, after the CEO's announcement, the head of human resources, a key player in any EVA implementation, stopped going to meetings of the steering committee, the topside company committee responsible for putting the program into place.

Then other members of the committee visibly lost their enthusiasm for the project. After all, they had been comfortable under the old system of negotiated annual bonus targets, under which they had personally prospered. Why risk the uncertainty of the new EVA incentives if the CEO, who had started the experiment, was soon to leave?

In the end, disaster was averted, though it was a close call. The CEO forcefully reasserted his authority, announcing that the new program would go into effect in three months as planned, while he was still very much in control. He realized that he had little choice, for he had previously publicized the fact that the company was going on EVA. It would have been monumentally embarrassing to reverse course now, particularly since the company was planning a large public share offering.

The incident illustrates one of the prime causes of EVA failure -- the lack, or the perceived lack, of full support from a company's chief executive. Any discussion of EVA would hardly be complete without mention of the hazards that can subvert a program, or of the unfavorable environments in which it would be impossible for EVA to survive, let alone flourish.

Primary determinant

Without question, the attitude of the chief executive is the primary determinant of the success or failure of the program. During the past four or five years, as the program was becoming widely known, a company occasionally adopted EVA largely for public relations purposes.

Many security analysts regard the embrace of EVA as a big plus, and there have been occasions -- as with Olin Corp. a few years ago, and with Federal-Mogul Corp. in 1997 -- when the mere announcement of an EVA plan caused a rise in the share price. But if the chief executive's support for the effort is less than wholehearted, the program is doomed to failure.

The reason: EVA is such a radical departure from the traditional way of measuring success and motivating people that it requires unremitting pressure from the top to enforce compliance in the echelons below. We must not forget that the adoption of EVA is synonymous with a total change in culture: size for its own sake, market share, and so-called top-line growth are out; value is in. Discipline in rejecting acquisitions and other investments that are deemed too expensive is crucial.

As suggested earlier, change is always stressful and often threatening in a mature bureaucracy. Unless there is a sense of urgency created by a desperate situation, most people are loath to tamper with settled practice. The nature of a rut is that it is often comfortable, and many executives have been enriched by following its well worn grooves. The one person who can shatter accepted practice, insist on change, and enforce change is the chief executive. Normally...

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