The originof Economic Value Added (EVA) can be traced back to Robert Hamilton, a Scottishmathematician, who published abook ‘An Introduction to Merchandize’ in 1777 and recognized that one could calculate amerchant’s gain only after deducting from his profits an interest charge on hisstock (Elliot & Kay, 1777;Hamilton, 1777). This concept as a matter of fact was later put forwardby Alfred Marshall, the notedCambridge Economist, in the early nineteenth century, who explained that in order to create wealth a firmmust earn more than the cost of funds it was supplied. He also proposed thatprofit is nothing but the residual income that eventually accrues to a firm’sowner as a return on his own invested capital.
Thisconcept was also looked into by Eugen Schmalenbach, alionized German Accounting Scholar of 1922 (Schmalenbach, 1922; Forrester,1993). The concept first entered the corporatearena in the 1920’s. It was introduced by the legendary leader Alfred PritchardSloan, Jr., of the General MotorsCorporation as a performance measurement concept; however, it was soonforgotten and then later was used by General Electric in1950’s under the label ‘Residual Income (RI)’, as a performance measure fortheir decentralized divisions (StewartIII, 1994; Das & Parmanik, 2009; Alexei, 2012). However, the current theory about EVA®,which is now a registered trademark of Stern Stewart & Co. and its concept,was propounded and commercialized worldwide by Gordon Bennett Stewart III and Joel Stern in 1982, who co-foundeda New York Consulting Firm called Stern Stewart & Company, in 1992, in theUnited States of America. It made them the foremost evangelists for the measure.
The company provides corporate advisory services to clients, primarily throughthe adoption of its EVA Management Approach (Grant, 1996). Developed by theconsulting firm Stern Stewart & Co., EVA appeared to be a promising tool tomeasure the wealth generated by a company for its equity shareholders. Itbasically is a measure of residual income essentially the surplus left aftermaking an appropriate charge for capital employed in the business and meetingthe necessary requirements for funds.
It is a power tool which when used withthe other metrics provides an integrated approach for firms engaged in intensepreparations for the future; maximizing their stock market values. It is arevolutionary strategy and a measure of true value creation. Their successspawned a whole host of imitators from other consulting firms, all of whichwere variants on the excess return measure (http://pages.stern.