Economic Value Added
(EVA) Business Model: Is it
Sustainable ?
 Dr. Lim Mah Hui
 INTI College, Penang
 July 21, 2012
1
Introduction
 What’s the raison d’etre of a firm or
company?
 Experience of EVA workshop
2
EVA Model
 Maximization of Returns to Shareholders
 EVA = (r-c).K = (rate of return – cost of
capital) x capital employed
OR
 Maximize NPV of FCF ( Net Present Value of
Free Cash Flow)
 FCF = EBIT +Depreciation – Changes in
Working Capital – Capital Expenditure
3
EVA applied to banking at every
level
Bank wide
Department
Individual
Way to increase EVA is to reduce
costs and usage of capital – best way
is to leverage, trading and fee based
activities
 Banks become NON-LENDING banks
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4
EVA
 Relate experience in Indonesia during
the Asian Financial Crisis
 Banks withdrew from lending to SMEs
 Concentrate on foreign exchange
trading
 Banks, companies focused on short
term gains rather than long term
growth
5
Banks – systemic crisis
 Larry Summers – after GFC we need
change in conceptual approach from
one based on fallacy of composition –
that in regulating each individual
entity, you are regulating the whole
system – to one based on what is
necessary for systemic stability
6
Fallacy of Composition
 Methodological flaw in which
understanding of and conclusion on
an economic or social fact is based on
analysis of its individual components
 Rational Expectation Theory in
Economics
 But the whole is > sum of its parts
7
Fallacy of Composition
 Each individual or part acting to
maximize its self interest instead of
contributing to collective good can
lead to systemic dysfunction
8
Examples
 Keynes Paradox of Savings
 Tragedy of Commons
 Jobless Growth
9
Business Ethics and CSR
 Icing on the cake
 Cant create responsible business
when over-arching value and principle
is maximize profits at all costs
 Reward and performance structure
more powerful than “individual
morality”
 Cant depend on business to self
regulate esp with externalities
10
Role of State (government)
 State not only to provide legal, social
and physical infrastructure for
business
 Role of state also to regulate, to
provide checks and balance, to guard
social interest
 Mega trend of 21st century –
relationship btw state and market
11
Externalities –definition and
examples
 Action of private actor’s benefit
individual but generate social and
economic costs that are passed on to
society
 Manufacturing industry – pollution
 Banking industry – over leverage and
lending > financial crisis and tax
payers carry costs of bail out
12
Externalities – Housing Industry
 Property construction industry developers profit maximization –
build to maximum density causing
traffic congestion
 Hill slope cutting causing erosion
 Housing treated as means of
investment and speculation rather
than consumption (living)
 Create international demand
13
Externalities
 Impact on domestic prices – house
price increase outstrip wage increase
> unaffordability
 Health industry – private hospitals
suck up resources from public
hospitals resulting in deterioration –
70% of specialists cater to only 30%
of population.
14
New Business Model
 Social Enterprise
 Consider other stake holders
 Socially Acceptable Rate of Return
(SARR) rather than EVA
 Job creation and job satisfaction
 Employees have say in business
 Workers participation in production
15
 THANK YOU
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