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Author: Patrick CoteContributors: Kate McGreevy Julian Critchlow bcCorporate Performance MeasurementApril 1999Copyright? 1999 Bain Company, Inc. Executive SummaryObjectivesBackgroundPerformance Measurement FrameworkMarket Value Added (MVA)Economic Profit (EP)Cash Flow Return on Investment (CFROI)Exercises MVAEconomic ProfitCase Study - DiageoAgenda2 Corporate performance evaluation has evolved from the 1960s focus on ROE to the current variations of economic profit that measure impact on shareholder valuemany firms have devised their own variations of economic profitStern Stewart’s Economic Value Added (EVA)TM is best known of these measures Holt/BCG’s Cash Flow Return on Investment (CFROI) is a similar concept presented in % return formatBoth ROE and EP are business metrics, tools used to measure the performance of the businessseparate from fundamental business drivers, the actual factors that influence shareholder value, and output measures the backward-looking records of overall company performanceFocusing on EP instead of ROE decreases the likelihood of destructive behavior by managersBy evaluating managers based on EP, manager behavior can be altered such that only projects that add value (with NPV0) are undertaken, which does not always occur with ROE Executive Summary (1 of 2)3 Executive Summary (2 of 2) End goal of EP exercises is consistent with traditional Bain focus of maximising shareholder valueBain has measured historical performance with Total Shareholder ReturnStern Stewart devised Market Value Added (MVA)TM as means of measuring market expectations of EP that managers will add in the futuremanagers’ objective should be to maximise MVAAll economic profit measures deduct charge for use of equity capital from accounting’s typical net income or profit after tax to reflect the opportunity cost associated with equity investmentsStern Stewart has trademarked EVATM by specifying adjustments to make to EP 4 AgendaExecutive SummaryObje