Essay Example on CEOs of all companies have a role to maximise their shareholder’s Wealth

An example of a company that focused its approach on earnings and ROE is Enron Stewart III 2003 68 The management of Enron was so focused on earnings per share EPS and ROE that they started to use debt to a great extent This caused the leverage to rise drastically but still the managers were not keen to tap into equity markets to relieve financial stress fearing that it would have an adverse impact on earnings figures However positive earnings figures did not create value for shareholders and thus prevent the company from collapsing Ehrbar and Stewart 1999 Modern Financial Indicator Economic Value Added EVA Capital ROC WACC Positive Aspect Thus the Economic value Added EVA indicator was introduced by Stewart 1990 p 137 Economic Value Added is better than the traditional accounting profits as a way of value creation as it takes account of the cost of capital and thus the riskiness of a company's operations Lehn Makhija 1996 p34 It comes the closest in revealing the true economic profit of any company and adjusting for accounting distortions by up to 164 adjustments Steward 1991 Blair 1997 There are situations when entities may pay tax to showcase that they have made profit for their shareholders and hence a falsification is carried with owners This is a common corporate issue which is rectified by EVA as it explicitly recognises when managers get capital they should pay for it as it were a wage IJBM 2009 

Ehrbar and Stewart 1999 Negative Aspect As EVA is a short term financial measure EVA performance measure works by reducing the excess capacity resulting in a reduced asset base Jan Bouwens and Roland F Spekle This reduced extra capacity is important for the firm as it caters for a flexible response to new growth opportunities Moreover this aroused divestment comes at the cost of reduced value capturing activity in future periods which is regarded as myopia Ashton Hopper and Scapens 2007 This way of reducing asset base to improve EVA not only puts the company under myopia but also misleads the shareholders together with adding a great amount of risk to their wealth Hogan and Lewis 1999 found no evidence of EVA having a positive effect on goal alignment than more traditional incentive plans EVA tends to produce parochial behaviour which is problematic when company goal accomplishment needs cooperation Jan Bouwens and Roland F Spekle Griffen 2004 explored EVA users under performed from its peers and market for a time period until 5 years In Malmi Ikaheimo s 2003 field study of six organisations explored a huge diversity in the real use of such measures from an almost inclusive implementation to a mere rhetorical reference to EVA concepts together with no meaning true meaning helping in decision making or management