EVA AND TOTAL QUALITY MANAGEMENT

Both TQM and EVA can be viewed as organizational innovations designed to reduce “agency costs”—that is, reductions in firm value that stem from conflicts of interest between various corporate constituencies. This article views TQM programs as corporate investments designed to increase value by reducing potential conflicts among non-investor stakeholders such as managers, employees, customers, and suppliers. EVA, by contrast, focuses on reducing conflicts between managers and shareholders by aligning the incentives of the two groups. Besides encouraging managers to make the most efficient possible use of investor capital, EVA reinforces the goal of shareholder value maximization in two other ways: (1) by eliminating the incentive for corporate overinvestment provided by more conventional accounting measures such as EPS and earnings growth; and (2) by reducing the incentive for corporate underinvestment provided by ROE and other rate-of-return measures. At a superficial level, EVA and TQM seem to be in direct conflict with each other. Because of its focus on multiple, non-investor stakeholders, TQM does not address the issue of how to make value-maximizing trade-offs among different stakeholder groups. It fails to provide answers to questions such as: What is the value to shareholders of the increase in employees' human capital created by corporate investments in quality-training programs? And, given that a higherquality product generally costs more to produce, what is the value-maximizing quality-cost combination for the company? The failure of TQM to address such questions may be one of the main reasons why the adoption of TQM does not necessarily lead to improvements in EVA. Because a financial management tool like EVA has the ability to guide managers in making trade-offs among different corporate stakeholders, it can be used to complement and reinforce a TQM program. By subjecting TQM to the discipline of EVA, management is in a better position to ensure that its investment in TQM is translating into increased shareholder value. At the same time, a TQM program tempered by EVA can help managers ensure that they are not under investing in their non-shareholder stakeholders.     

A Better Way to Measure Operating Performance (or Why the EVA Math Really Matters)

Most companies rely heavily on earnings to measure operating performance, but earnings growth has at least two important weaknesses as a proxy for investor wealth. Current earnings can come at the expense of future earnings through, for example, short‐sighted cutbacks in investment, including spending on R&D. But growth in EPS can also be achieved by investing more capital with projected rates of return that, although well below the cost of capital, are higher than the after‐tax cost of debt. Stock compensation has been the conventional solution to the first problem because it's a discounted cash flow value that is assumed to discourage actions that sacrifice future earnings. Economic profit—in its most popular manifestation, EVA—has been the conventional solution to the second problem with earnings because it includes a capital charge that penalizes low‐return investment. But neither of these conventional solutions appears to work very well in practice. Stock compensation isn't tied to business unit performance—and often fails to provide the intended incentives for the (many) corporate managers who believe that meeting current consensus earnings is more important than investing to maintain future earnings. EVA doesn't work well when new investments take time to become profitable because the higher capital charge comes before the related income. In this article, the author presents two new operating performance measures that are likely to work better than either earnings or EVA because they reflect the value that can be lost either through corporate underinvestment or overinvestment designed to increase current earnings. Both of these new measures are based on the math that ties EVA to discounted cash flow value, particularly its division of current corporate market values into two components: “current operations value” and “future growth value.” The key to the effectiveness of the new measures in explaining changes in company stock prices and market values is a statistical model of changes in future growth value that captures the expected effects of significant increases in current investment in R&D and advertising on future profits and value.     

Why Capital Efficiency Measures Are Rarely Used in Incentive Plans, and How to Change That

Despite the wide acceptance of DCF valuation and its corollary that value is created only by earning more than the cost of capital, very few companies use performance measures that focus on corporate efficiency in using capital—measures such as return on capital (ROC) or economic value added (EVA)—as the main basis for their top management incentive programs. In this article, the authors begin by documenting the surprisingly limited use of such measures in management incentive plans. Next they analyze three often cited problems—difficulty in retaining managers, discouragement of growth investment, and complexity—that could account for the limited use of such measures. Third and last, they suggest a number of adjustments to standard capital efficiency measures that are designed to address these problems and, in so doing, to give corporate directors more confidence in using measures like EVA to reward and hold managers accountable for value-adding performance.
In illustrating the problems encountered when using such performance measures, the article uses case studies of three long-time "EVA companies"—Briggs & Stratton, Herman Miller, and Manitowoc—to highlight the difficulty of using a "bonus bank" (or "clawback") system to hold managers fully accountable for earning a minimum return on capital. After presenting empirical data that shows "delayed productivity" of invested capital, the authors suggest that conventional capital efficiency measures can discourage value-increasing growth.
The article concludes by recommending that although measures like EVA used in combination with negative bonus banks provide the right incentives, EVA capital charges should be phased in gradually to reflect the delayed productivity of capital. At the same time, corporate boards should consider providing bonus bank "relief" when market and industry factors have excessively large negative effects on the performance measures and bonus awards.     

An Investigation of the Dynamic Relationship between Agency Theory and Dividend Policy

Agency theory posits that the dividend mechanism provides an incentive for managers to reduce the costs associated with the principal/agent relationship. Distributing resources in the form of cash dividends forces managers to seek outside capital, thus causing them to reduce agency costs as they subject themselves to the scrutiny of the capital marketplace. Under this scenario the optimum level of dividend payout is that which minimizes the agency cost structure relative to the cost of raising needed funds. A test of this theory employing time-series cross-sectional analysis and more direct measures of the agency cost structure shows that these tenets of agency theory may be valid. Managers do appear to adjust the dividend payout in response to the agency cost/transaction cost structure, both through time as well as across firms.     

Beyond EVA

A former partner of Stern Stewart begins by noting that the recent acquisition of EVA Dimensions by the well‐known proxy advisory firm Institutional Shareholder Services (ISS) may be signaling a resurgence of EVA as a widely followed corporate performance measure. In announcing the acquisition, ISS said that it's considering incorporating the measure into its recommendations and pay‐for‐performance model. While applauding this decision, the author also reflects on some of the shortcomings of EVA that ultimately prevented broader adoption of the measure after it was developed and popularized in the early 1990s. Chief among these obstacles to broader use is the measure's complexity, arising mainly from the array of adjustments to GAAP accounting. But even more important is EVA's potential for encouraging “short‐termism”—a potential the author attributes to EVA's front‐loading of the costs of owning assets, which causes EVA to be negative when assets are “new” and can discourage managers from investing in the business. These shortcomings led the author and his colleagues to design an improved economic profit‐based performance measure when founding Fortuna Advisors in 2009. The measure, which is called “residual cash earnings,” or RCE, is like EVA in charging managers for the use of capital; but unlike EVA, it adds back depreciation and so the capital charge is “flat” (since now based on gross, or undepreciated, assets). And according to the author's latest research, RCE does a better job than EVA of relating to changes in TSR in all of the 20 (non‐financial) industries studied during the period 1999 through 2018. The article closes by providing two other testaments to RCE's potential uses: (1) a demonstration that RCE does a far better job than EVA of explaining Amazon's remarkable share price appreciation over the last ten years; and (2) a brief case study of Varian Medical Systems that illustrates the benefits of designing and implementing a customized version of RCE as the centerpiece for business management. Perhaps the most visible change at Varian, after 18 months of using a measure the company calls “VVA” (for Varian Value Added), has been a sharp increase in the company's longer‐run investment (not to mention its share price) while holding management accountable for earning an adequate return on investors’ capital.     

EVA AND DIVISIONAL PERFORMANCE MEASUREMENT: CAPTURING SYNERGIES AND OTHER ISSUES

This article makes three basic points about divisional performance measurement that managers should keep in mind when attempting to choose between EVA and more conventional, accounting-based measures. First, no divisional performance measure, whether it be EVA, divisional net income, or ROA, is capable of capturing synergies among divisions—those shared benefits or costs that make the sum of the parts worth more than the whole. And EVA is neither more nor less effective than more conventional financial measures in deterring divisional managers from taking actions that increase divisional profits at the expense of corporate value. Thus, there is a fundamental contradiction in the very attempt to evaluate the divisions of a multi—divisional firm as if they were independent companies. If there are synergies, divisional performance measures—even those employing transfer prices—are likely to prove inadequate in some respects (and this article recommends some methods for encouraging synergies that might be used to supplement if not replace divisional measures). But if there are no synergies, then top managers should re-examine their business strategy and consider selling or spinning off divisions. Second, a given performance measure's degree of correlation with stock returns should not be management's sole, or even its most important, criterion in choosing to adopt a given performance measure. A better method for evaluating performance measures is to weigh the behavioral or incentive benefits of a given measure against all direct and indirect costs associated with its implementation. In making such a costbenefit analysis, the incentive benefits from the tighter linkage of rewards to share prices provided by more market-based measures should be traded off against the greater market risk and exposure to other uncontrollables imposed by such measures as well as the costs involved in changing the firm's internal accounting and reporting systems. Third, the EVA practice of “decoupling” performance measures from GAAP accounting, while having have potentially significant incentive benefits, also has potential costs in the form of increased auditing requirements and the possibility of litigation.     

CREATING VALUE AT A CONGLOMERATE: THE CASE OF THE GODREJ GROUP

This discussion with the chairman of the Godrej Group, a well-known India-based conglomerate, begins by exploring the issue of diversification versus a single-industry focus, particularly in developing countries. Mr. Godrej observes that the capital and managerial talent provided by a corporate parent can be invaluable resources in a developing economy, where such commodities are likely to be in relatively short supply. On the other hand, he notes, a conglomerate must have some underlying strategic rationale in order to create value, and a diversified company will work only "when each of its businesses is run with clear and focused accountability."
To that end, the Godrej Group recently instituted the EVA performance management framework in six of its key businesses. In particular, the management teams running those businesses are rewarded according to the terms of an EVA-based incentive plan. Each business has since seen significant improvements in capital efficiency, market share, and overall performance. The stock price of the Godrej Group's publicly held entity has more than doubled (in a flat market), and the vast majority of the employees believe that the EVA implementation has been the company's most important recent initiative. Management teams are said now to look much more carefully at options for outsourcing, contract manufacturing, eliminating bottlenecks, and even reusing old equipment at new facilities.
Perhaps the most significant change, however, is that the "improved rigor and discipline of our EVA-based capital allocation system" has permitted Godrej family members to move from operationsoriented, owner-manager functions to a broader leadership role. The EVA system has allowed them to feel more comfortable in decentralizing day-to-day decision-making because they are confident that managers and employees are all working in the shareholders' interests.     

Specific Knowledge and Divisional Performance Measurement

This classic by the formulators of agency cost theory discusses five common divisional performance measurement methods—cost centers, revenue centers, profit centers, investment centers, and expense centers—while providing a theory that attempts to explain when each of these methods is likely to be the most efficient. The central insight of the theory is that each method offers a different way of aligning decision-making authority with valuable "specific knowledge" inside the organization.
The theory suggests that cost and revenue centers work best in cases where headquarters has good information about cost and demand functions, product quality, and optimal output mix. Profit centers—defined as business units whose managers have responsibility for overall profits, but not the authority to make major capital spending decisions—tend to supplant revenue and cost centers when line managers have a significant informational advantage over headquarters and when there are few interdependencies (or "synergies") between divisions. Investment centers—profit centers in which unit managers are allowed to make major investment decisions—tend to prevail when the activity is capital-intensive and when it is difficult for headquarters to identify the value-maximizing investment strategy.
In evaluating the performance of profit centers, rate-of-return measures like ROA are likely to be effective when unit managers do not have major influence over the level of new investment. But, in the case of investment centers, Economic Value Added, or EVA, is likely to be the most effective single-period measure because it is designed to encourage only value-increasing investment decisions.     

Instructional case: Blue Ridge Revisited—Integrating ABC and OROS Quick® software

Blue Ridge Manufacturing Company produces customized towels for the US sports market. Recently, competitive pressures motivated the company to institute an activity-based costing (ABC) system for allocating manufacturing support costs to its major product lines. Management is pleased with the manufacturing cost information that the ABC system is providing and is beginning to use the ABC data to drive process improvements. To secure additional gains, management is now interested in conducting a customer profitability analysis. Currently, the company allocates its Selling, General, and Administrative (SG&A) costs to products and/or customers on the basis of sales volume (units). The question posed to you, in your role as a member of a team of managerial accountants, is whether the SG&A costs can be more accurately assigned to customer groups (“large,” “medium,” and “small,” as determined by sales volume). To this end, you have been asked to build and interpret the results of an ABC model that assigns SG&A costs to each of these three customer groups. Blue Ridge has recently implemented a new software system that includes an ABC module (called OROS Quick®), which you will use to build your cost assignment model and to respond to a number of managerial questions based on the cost analysis you perform.     

EVA AND THE "NEW ECONOMY"

Some have observed that the new economy means the end of the EVA performance measurement and incentive compensation system. They claim that although the EVA system is useful for oldline companies with heavy investments in fixed assets, the efficient management of investor capital is no longer an imperative for newage firms that operate largely without buildings and machinery–and, in some cases, with negative working capital. This article argues that EVA is not only suitable for the emerging companies that lead the new economy, but even more important for such firms than for their “rust belt” predecessors. While there may be a new economy in terms of trade in new products and services, there is no new economics– the principles of economic valuation remain the same. As in the past, companies will create value in the future only insofar as they promise to produce returns on investor capital that exceed the cost of capital. It has made for sensational journalism to speak of companies with high valuations and no earnings, but this is in large part the result of an accounting framework that is systematically flawed. New economy companies spend much of their capital on R&D, marketing, and advertising. By treating these outlays as expenses against current profits, GAAP accounting presents a grossly distorted picture of both current and future profitability. By contrast, an EVA system capitalizes such investments and amortizes them over their expected useful life. For new economy companies, the effect of such adjustments on profitability can be significant. For example, in applying EVA accounting to Real Networks, Inc., the author shows that although the company reported increasing losses in recent years, its EVA has been steadily rising–a pattern of profitability that corresponds much more directly to the change in the company's market value over the same period. Thus, for stock analysts that follow new economy companies, the use of EVA will get you closer to current market values than GAAP accounting. And for companies intent on ensuring the right level of investment in intangibles– neither too much nor too little– EVA is likely to send the right message to managers and employees. The recent decline in the Nasdaq suggests that stock market investors are starting to look for the kind of capital efficiency encouraged by an EVA system.     

SPECIFIC KNOWLEDGE AND DIVISIONAL PERFORMANCE MEASUREMENT

This paper discusses five common divisional performance measurement methods—cost centers, revenue centers, profit centers, investment centers, and expense centers—and provides the beginnings of a theory that attempts to explain when each of these five methods is likely to be the most efficient. The central insight of the theory is that each of these methods offers an alternative way of aligning decision-making authority with valuable "specific knowledge" inside the organization.
The theory suggests that cost and revenue centers work best in cases where headquarters has good information about cost and demand functions, product quality, and optimal output mix. Profit centers—defined as business units whose managers have responsibility for overall profits, but not the authority to make major capital spending decisions—tend to supplant revenue and cost centers when the line managers have a significant informational advantage over headquarters and when there are few interdependencies (or "synergies") between divisions. Investment centers—that is, profit centers in which unit managers are allowed to make major investment decisions—tend to prevail when the activity is capital-intensive and when it is difficult for headquarters to identify the value-maximizing investment strategy.
In evaluating the performance of profit centers, rate-of-return performance measures like RONA (return on net assets) are likely to be effective when unit managers have little influence over the level of new investment. But, in the case of investment centers, Economic Value Added, or EVA, is likely to be the most effective single-period measure of performance because it is best designed to encourage value-maximizing investment decisions.     

EVA IN THE E&P INDUSTRY: THE CASE OF NUEVO ENERGY

This article presents a case study illustrating some aspects of the new business model discussed in the roundtable above. Continuing a major theme in the roundtable, the authors begin by arguing that the long‐run failure of the E&P industry to create shareholder wealth stems to a large degree from weak or distorted incentives held out to the top executives and managers of most large, publicly traded companies. This article traces the incentive problem to the lack of an effective wealth creation metric to guide the financial management process. Although the industry employs a variety of accounting‐based performance measures, none is a reliable measure of wealth creation. In place of traditional financial metrics such as earnings, annual cash flow, and return on capital, this article recommends a performance evaluation and incentive compensation system that is tied to the use of a “reserve‐adjusted” EVA measure—one that exhibits a strong statistical correlation with changes in shareholder wealth in the E&P business. The greater explanatory power of this new measure reflects the reality that changes in the value of reserves in the ground can greatly outweigh changes in annual earnings or cash flows. As the focal point of a compensation plan, EVA has advantages over stock options in that it can be calculated at various levels in the organization, even at the level of a single well, whereas stock prices only exist for the company as a whole. For this reason, an EVA incentive system permits a clearer “line of sight” between pay packages and the performance of the part of the business for which managers are directly accountable. Perhaps even more important, EVA can be calculated (using an “internal hedging” mechanism) in a way that removes the impact of changes in oil prices on the incentive outcome. And, as demonstrated in the case study of Nuevo Energy, such internal hedging allows companies to give their employees a much greater share of wealth created with far less cost than by simply granting stock or stock options.     

EVA,not EBITDA: A New Financial Paradigm for Private Equity Firms

Private equity firms have boomed on the back of EBITDA. Most PE firms use it as their primary measure of value, and ask the managers of their portfolio companies to increase it. Many public companies have decided to emulate the PE firms by using EBITDA to review performance with investors, and even as a basis for determining incentive pay. But is the emphasis on EBITDA warranted? In this article, the co‐founder of Stern Stewart & Co. argues that EVA offers a better way. He discusses blind spots and distortions that make EBITDA highly unreliable and misleading as a measure of normalized, ongoing profitability. By comparing EBITDA with EVA, or Economic Value Added, a measure of economic profit net of a full cost‐of‐capital charge, Stewart demonstrates EVA's ability to provide managers and investors with much more clarity into the levers that are driving corporate performance and determining intrinsic market value. And in support of his demonstration, Stewart reports the finding of his analysis of Russell 3000 public companies that EVA explains almost 20% more than EBITDA of their changes in value, while at the same time providing far more insight into how to improve those values.     

Why EVA Bonus Plans Failed—and How to Revive Them

Most companies rely heavily on earnings to measure their financial performance, but earnings growth has at least two important weaknesses as a proxy for investor wealth. Current earnings growth may come at the expense of future earnings through, say, shortsighted cutbacks in corporate investment, including R&D or advertising. But growth in earnings per share can also be achieved by “overinvesting”—that is, committing ever more capital to projects with expected rates of return that, although well below the cost of capital, exceed the after‐tax cost of debt. Stock compensation has been the conventional solution to the first problem because it's a discounted cash flow value that is assumed to discourage actions that sacrifice future earnings. Economic profit—in its most popular manifestation, EVA—has been the conventional solution to the second problem because it includes a capital charge that penalizes low‐return investment. But neither of these conventional solutions appears to work very well in practice. Stock compensation isn't tied to business unit performance, and often fails to motivate corporate managers who believe that meeting consensus earnings is more important than investing to maintain future earnings. EVA often doesn't work well because increases in current EVA often come with reduced expectations of future EVA improvement—and reductions in current EVA are often accompanied by increases in future growth values. Since EVA bonus plans reward current EVA increases without taking account of changes in expected future growth values, they have the potential to encourage margin improvement that comes at the expense of business growth and discourage positive‐NPV investments that, because of longer‐run payoffs, reduce current EVA. In this article, the author demonstrates the possibility of overcoming such short‐termism by developing an operating model of changes in future growth value that can be used to calibrate “dynamic” EVA improvement targets that more closely align EVA bonus plan payouts with investors’ excess returns. With the use of “dynamic” targets, margin improvements that come at the expense of business growth can be discouraged by raising EVA performance targets, while growth investments can be encouraged by the use of lower EVA targets.     

What Determines TSR

Researchers have long wrestled with the question of what determines a company's total shareholder return, or TSR, and their results have been decidedly mixed. Some empirical studies come down in favor of dividends or earnings per share, while others favor return on capital or other profitability measures. In this article, the author takes a “first principles” approach that begins by demonstrating that TSR should be a function of a company's economic profit, or its Economic Value Added (or EVA). He shows that, from a theoretical standpoint, the sum of dividends and share price appreciation—which is the definition of TSR—is ultimately a function of increasing EVA and, along with it, a company's “aggregate NPV.” He further shows that if stock prices are determined by discounting expected cash flows, corporate NPV will equal the discounted value of EVA, and increasing NPV will come down to increasing EVA. In developing his argument, the author demonstrates that TSR is actually a leveraged version of a measure he calls “TIR,” or total investor return, which is the blended return that an investor would earn from owning the entire capital structure of a company, bonds as well as stock. He then presents the findings of regression analysis showing that a company's TIR and TSR are both strongly positively correlated with its EVA performance plus the change in its aggregate NPV (with R²s equal to 1.0 and 0.94, respectively). In a final step, the author shows that the change in EVA provides a better statistical explanation than other financial measures for changes in aggregate NPV and, hence, actual TSR     

Enacting a European supply chain: a case study on the role of management accounting

This study reports on an action research project carried out in two non-Japanese, U.K. manufacturing companies that were considering the establishment of a strategic supply partnership. In the assembler company, materials constituted 80% of manufacturing costs with the result that managing supply chain costs has become a most critical element in overall cost control. The company was seeking closer ties involving information sharing and R&D collaboration with suppliers of strategic components. On its part, the supplier wished to move towards the level of co-operation and trust that the two companies had realized in their U.S. operations. The participation of the researchers as neutral intermediaries between the two companies gave them an opportunity to analyse the role of management accounting in the construction of a strategic partnership. The constitutional role of accounting is highlighted together with the need to develop costing and performance measurement technologies that can be understood and respected by both senior managers and non-accountants involved in the procurement process.     

The myth of Japan's low-cost capital

The low rate at which U.S. companies are investing in manufacturing and the resulting decline in America's competitive position has been a topic of grave concern for more than a decade. During that time, critics have offered many excuses for this shortsighted investment behavior. Yet one excuse has steadily gained adherents and is becoming something of an article of faith--that is, that capital in the United States is more expensive than in other countries, particularly Japan. It is both a popular and appealing argument. Yet authors W. Carl Kester and Timothy A. Luehrman, professors at the Harvard Business School, warn that this argument is not only false but also dangerous. They assert that the empirical evidence does not support the claim that the U.S. manufacturing sector has persistently faced significantly higher average capital costs than the Japanese manufacturing sector. The authors argue that differences in capital costs have been isolated and temporary, not broad and persistent. To prove their point, Kester and Luehrman critically dissect both the common wisdom and the academic studies on the topic. They conclude that in the new global economy, all companies--Japanese, American, European, and others--must compete for the same capital. Some will succeed in obtaining it on temporarily favorable terms, not because they are Japanese but because they are efficiently organized and governed. But as long as an alleged international cost-of-capital gap is their excuse, U.S. managers run the risk of retaliating counterproductively against U.S. trading partners or doing nothing at all inside corporations. In short, managers should stop complaining about how much capital costs and worry more about how to manage it after it's been raised.     

The surprising economics of a "people business"

When people are your most important asset, some standard performance measures and management practices become misleading or irrelevant. This is a danger for any business whose people costs are greater than its capital costs-that is, businesses in most industries. But it is particularly true for what the authors call "people businesses": operations with high employee costs, low capital investment, and limited spending on activities, such as R&D, that are aimed at generating future revenue. If you run a people business-or a company that includes one or more of them how do you measure its true performance? Avoid the trap of relying on capital-oriented metrics, such as return on assets and return on equity. They won't help much, as they'll tend to mask weak performance or indicate volatility where it doesn't exist. Replace them with financially rigorous people-oriented metrics-for example, a reformulation of a conventional calculation of economic profit, such as EVA, so that you gauge people, rather than capital, productivity. Once you have assessed the business's true performance, you need to enhance it operationally (be aware that relatively small changes in productivity can have a major impact on shareholder returns); reward it appropriately (push performance-related variable compensation schemes down into the organization); and price it advantageously (because economies of scale and experience tend to be less significant in people businesses, price products or services in ways that capture a share of the additional value created for customers).     

Management accounting within world class manufacturing: a case study

This is a case study of a U.K. chemical company implementing World Class Manufacturing (WCM). In the late 1980s the company encountered serious problems due to the rapid contraction of major customers. It embarked on a programme of improving manufacturing introducing, inter alia, new quality programmes and computerized production controls including MRPII. Whilst these programmes were successful they failed to produce the turnaround sought. Faced with impending extinction, the managers sought external advice from consultants during a WCM workshop organized by government development agencies. Following this the company embarked on a benchmarking and strategic assessment exercise which diagnosed the company as unduly manufacturing oriented, poor on new product development and marketing, and insufficiently responsive to consumer needs. They adopted WCM principles embracing six broad objectives: customer responsiveness, employee involvement, quality, reduced lead-times, continuous improvement, and shop floor training for flexibility and problem solving skills. The implementation of WCM was successful: there was objective recorded evidence of improved performance against targets set in the WCM programme. Management accounting superficially appeared unaffected by WCM. The budgetary control system run by the accounting department remained intact. Product costing systems were not changed to incorporate Activity-Based drivers, as predicted in the literature. However, there was a marked decline in the influence of the accounting department, partly due to the cost module within MRPII. The accountant became dependent on production for cost data. Whilst his responsibilities continued to include the preparation of financial accounts and periodic budgets, cost management in terms of cost reduction, target setting, diagnosis and problem-solving came to lie with production. The suggestion of the case is that financial improvement may lie more with programmes of employee development and involvement, making the company more quality conscious, flexible and adaptive rather than in any redesign of costing systems. The implications of the research upon management accounting change debates are discussed in the concluding section.     

EVA AND SHAREHOLDER VALUE IN JAPAN

In a series of individual presentations and a follow-up set of exchanges, a group of academics and corporate practitioners discuss current problems with the Japanese corporate governance system and the potential role of EVA in addressing them. Professor Tak Wakasugi of Tokyo University identifies the problem as Japanese managers' devotion to "growth at all costs"-an approach encouraged by the illusion that equity capital is a "free and unlimited resource." Both Wakasugi and EVA advocate Joel Stern argue that adoption of the EVA performance measurement and incentive system would help impress upon Japanese managers the reality that capital is costly, but without causing them to cut back on promising investments (as would a single-minded focus on a rate-of-return measure like ROE).
In the three presentations that follow, Virgil Stephens, Toru Mochizuki, and Mark Newburg-the CFOs, respectively, of Eastman Chemical, Coca-Cola Japan, and NCR Japan- discuss the implementation and workings of EVA within their companies.