Nearly every economist and serious investor accepts that shareowner value (not necessarily price, but value) is discounted cash flow (DCF) and DCF value (what we call “Fair Value” or “Intrinsic Value”) implies that shareowners are better off when companies pay out any capital that is expected to earn less than the cost of that capital.
Despite wide acceptance of this principle – the closest thing that all economists agree on – very few companies use a capital efficiency measure like EVA in their top incentive plans.
In this short video free from the CFA Institute, Joel M. Stern explains the origins and applications of Economic Value Added (EVA), a metric that he invented at his firm, Stern Stewart & Co. In addition, Mr. Stern describes the current market conditions, the collapse of the “comparative advantage period,” and alternative sources of equity funding for public companies.
Pay careful attention to why Joel thinks companies should adopt strong incentives tied to EVA or another capital efficiency measure now to accelerate their recovery.