Stern Stewart & Co.

THE SCOOP

The virtue of value

The advice that Stern Stewart & Co. gives to clients is built around EVA (economic value added) and VBM (value based management), extending into value based strategy, value based incentive compensation and value based operations. EVA is a term that gets thrown around by a lot of people these days, but it all began at Stern Stewart. Let's be very clear-if you don't believe in EVA, then this is not the firm for you. If you do, though, you won't be alone. Hundreds of companies have adopted Stern Stewart's EVA methods and ideas, including Best Buy, Briggs & Stratton, Credit Suisse, Coca Cola, Goldman Sachs, Herman Miller, Hertz, Grupo Modelo (the makers of Corona beer), Morgan Stanley, Siemens, Sony, the U.S. Postal Service, Whole Foods and the Williams Companies. The firm likes to stick with these clients for the long haul too-it believes that six months to three years might be necessary to fully internalize its methods. 

Chicago-style, deep-dish EVA

CEO Joel Stern says that the origins of EVA came from his time at the University of Chicago, when he began to feel that the reigning model of EPS (earnings per share) was inadequate for determining the true value of companies. After graduating, Stern spent 18 years at Chase Manhattan Bank, where he helped create the concept of "free cash flow," and continued working on the ideas that would become EVA. In 1982, he decided that the time was right and teamed up with G. Bennett Stewart, who was also an EVA believer and alumnus of the University of Chicago, to form Stern Stewart. The two men spent the next decade refining and promoting the ideas of EVA, which culminated in Stewart's groundbreaking 1991 book on the subject, The Quest for Value: The EVA Management Guide. Although Stewart's book remains the core EVA text, it can be a pretty dense read, so the firm has also published a variety of other books that simplify or modify the method, such as 1998's EVA: The Real Key to Creating Wealth, by consultant Al Ehrbar.

 

So how does it work?

The firm's EVA method seeks to determine the real profit of a company as seen from the perspective of shareholders. Basically, it's the net operating after-taxes profit minus any opportunity costs for invested capital. This number is then compared to the minimum rate of return required by investors, known as the weighted average cost of capital. The amount that the company is above or below that rate is then used to judge the company's health. 

EVA believers feel that this method is superior to others because it can be calculated at the divisional level, it better tracks performance over time, and it recognizes that companies must eventually account for both operating and capital costs. EVA-ites say that EPS, by comparison, fails to show how many resources went into creating growth. Plus, EVA simplifies a company's finances by coordinating the three basic financial statements (income statement, balance sheet and cash flow statement) into a single method for calculating value. Another major benefit of EVA, according to the firm, is that it keeps shareholders happy, which makes companies safe from hostile takeovers. Stern also says that EVA creates greater transparency, because it's too hard for sections of a company to hide from its glaring spotlight.

 

Early adopter

One of the most famous companies to come onboard with the idea of EVA was soft drink manufacturer Coca-Cola. Coca-Cola likes to describe how EVA inspired it to switch to cardboard containers for shipping cola concentrate. Although the stainless steel containers that the company had been shipping were reusable, the lower initial cost of cardboard containers freed up assets that could be used right away for other purposes. The value of those freed assets more than made up for the money saved through the reusability of the steel containers.

 

Some rain on the parade

EVA does have its detractors, however. Much of this skepticism comes from the belief that EVA-ites rely too heavily on just one metric. Business guru Gary Hamel has said, "No one measure can capture all the dynamics of corporate performance." Some people worry that companies that depend too much on EVA will start to ignore other important areas, such as product quality and customer satisfaction. Many high-tech firms feel that EVA doesn't adequately measure the value of innovation and knowledge capital. In addition, even some EVA believers acknowledge that although it's excellent for determining financial statement issues like the value of an acquisition, it doesn't give much insight into how to run companies on a day-to-day basis (although Stern Stewart would, of course, argue these points).

 

But that's not EVA-rything

But the Stern Stewart process is more than just calculating EVA. Having developed and pioneered EVA management practices and incentives, the firm offers corporate finance advice from a value perspective, rather than relying on conventional accounting measures, which they claim bear little relationship to shareholder value. The firm tries to figure out how customers can not only be given value, but also generate it. Among its array of methods are benchmarking to determine the client's value against current and future estimates for both the market and competitors; coordinated allocation of investment funds based on greatest potential value; and customized pricing strategies. In addition, the firm selects strategies for each unit of a business based on growth, efficiency or consolidation. It may establish a pay-for-performance culture to increase results and, in periods of transition, analyze and streamline mergers and acquisitions. The firm also helps clients get in shape for IPOs.



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Stern Stewart & Co.


75 Broad Street
29th Floor
New York, NY 10004
Phone: (212) 261-0600
Fax: (212) 581-6420
www.sternstewart.com

STATS


  • Employer Type: Private
  • Chairman & CEO: Joel M. Stern

  • Employment Contact

    careers@sternstewart.com


  • Major Departments & Practices

    Corporate Finance Advisory

    Governance

    Value Based Management

    Value Based Operations

    Value Based Strategy

Major Office Locations

  • New York, NY (HQ)
  • Beijing
  • Kuala Lumpur
  • London
  • Mumbai
  • São Paolo
  • Singapore
  • Tokyo (Franchise)
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