According to EVA-evangalists, traditional accounting-based measures such as earnings per share (EPS), return on equity (ROE), often fail to reflect `economic reality'. Stern Stewart, in fact, has identified over 120 accounting anomalies that make traditional accounting measures like EPS and even Return on Equity highly misleading measures of performance. EVA, on the other hand, is based on a simple premise that true economic profits must account for the cost of capital and investments made in areas like R&D and employee training.

For instance, traditional accounting requires companies to reflect all R&D outlays on the current year's profit & loss statement, but because productive R&D has an economic life considerably longer than one year, conventional accounting of R&D costs causes both net earnings and shareholder's funds or net assets to be significantly understated. In such a case, an EVA measurement system, believes Stern, would correct traditional accounting by capitalising the R&D and writing it off over a period that approximates its expected economic life.

One of the important aspects of the EVA is the incentive compensation system, which Singh says, can be used to motivate everyone in the organisation from senior management down through the ranks to the shop floor. The aim: increasing shareholder wealth. ``The EVA system promotes accountability and long-term thinking amongst employees. It ensures employees have a stake in the organisation while they are motivated to think like, act like and be paid like owners,'' says Singh. Though the EVA idea has been around for quite some time now, in India, it has picked up only lately. ``Most of the Indian companies are destroying EVA rather than creating it,'' says Singh.

Although EVA is being used by some of the leading investment banks and financial institutions like Credit Lyonnais, Goldman Sachs, Lehman Brothers, Morgan Stanley and several others as their primary tool for valuing companies, EVA has a very low implementation rate in India. HLL and NIIT are perhaps the only two companies which are using the system.

Worldwide more than 400 companies now use EVA and as per the data most of them significantly outperform other companies in their industries. A recent study in the US confirmed that EVA clients outperformed their peers, in any given industry by 8.55 per cent per year, a total extra return of 50.7 per cent over five years. Prior to Stern Stewart association, IQL has joined hands with leading management consultants such as Philip Crosby Associates, Juran Institute founded by Dr Joseph M Juran and the Best Practice Institute founded by Dr Robert C Camp.

Is your EVA slipping?
Are you one of the biggest wealth creators or destroyers of EVA (economy value added)? To find out, make sure you are in the Indian version of the Stern Stewart Performance 500 rankings -- on the lines of the Stern Stewart Performance 1000 rankings published annually in Fortune magazine -- being currently prepared by the Institute of Quality Learning (IQL). Likely to be out in February 2000, the list will use the proprietary EVA methodology to evaluate the top India 100 -- it may go up to 500 companies, depending on the response -- on the basis of their EVAs.