Shareholder value

During the 90's we saw an increased interest in and focus on shareholder value and how this value could be increased. According to most economic theories, businesses are supposed to maximize its shareholder value. A company exists to please its shareholders.

You need a good measure of shareholder value and one such measure is profit. If we maximize profits then we maximize shareholder value. Profit is not regarded as a good enough measure of shareholder value and some have argued that net cash flow has a higher correlation with shareholder value than profits. The net cash flow are receipts minus payments, and cash flow is free from accounting manipulations.

EVA (Economic Value Added) is a measure of shareholder value that is used in businesses to encourage senior executives to increase shareholder value. EVA has been linked to a bonus so that senior executives get bonuses when EVA is positive or when EVA increases.

EVA = Net operating profit - (invested capital * required return )

EVA is the value created for shareholders and it is therefore a good measure to use in financial management and bonus systems to achieve maximum shareholder value.