Tone from the top for economic value addition (EVA) - Part 2What is EVA or Economic Value Addition? Simplified definition being, EVA is a measure of a business unit manager performance. It measures true profitability. EVA = After Tax Operating Profit – After Tax Cost of Capital EVA, measures the true economic profit for a given year reflecting Managers’ performance.
Economic value addition is different from accounting profit. It represents the residual income net of capital cost. Capital is made of debt (capital) and equity (capital) and incurs a cost: Cost of funds. In terms of cost of debt, it is transparent and direct. It is the interest cost. However, in relation to equity, the cost is not straight forward. It involves an opportunity cost. It is, investing in project A versus project B with the same risk profile: Sunday brunch vs Sunday lunch. Why would a potential investor favor project A over project B or why would a resort favor a brunch versus a lunch? Answer lies in analyzing the opportunity cost. Simply, the potential investor is lured, to the project that gets a higher bang for the buck for the same assumed exposure and capital outlay.
The above EVA formulae and assumptions are fundamentally flawed and I take issue. Across the wide spectrum of mercantile sector, undivided attention is given to management of monitory capital and not human capital management. Among the two, human capital management is far more significant than monitory capital.
“I truly believe that if you look after your employees, they will take care of your business”– Sir Richard Branson. This is sufficient testimony to the universal maxim where the workers come first and then come the customers, finally comes the investor and then profit.Earlier in the write, a cursory reference was made to the manager ability to add comparative advantages to an operation.
Let me expand on this. Human capital development and management is at the core of a manager's ability to add comparative advantages to an operation. The interesting times we all live in, the sooner we have cognizance that the work force is becoming an educated outfit, the better we become equipped to add that comparative operational advantage.
More importantly, it’s imperative to know that in form we are all equal: got the same wants, fears, likes and dislikes.Individual arrogance be shunned at all cost. The workers come from a diverse background with varying mental and physical constraints. Then, the benevolent manager’s role is to be seen as the facilitator of empowering a workforce and develop the outfit to reach maximum potential and make them the custodians of the corporate goal at a micro level and societal goals at a macro scale. It’s the managers ability to recognize the innate skills of the worker and then give them the confidence that the manager trusts their ability and thereby inculcate self confidence in the worker to be able contribute to the bigger corporate goal: empower.
This worker empowering is happening but at a snail space in Sri Lanka. I am reminded of a corporate Chef with a reputation of being a tyrant in his day, but demonstrated an innate ability to develop workers who would come under his wings from remote corners of the nation. Under his guidance these youth were transformed to be world class pastry chefs representing Sri Lanka at Food Olympics, winning gold medals back to back. He developed this skill while he developed the workers – a ‘win-win’ outcome, driven by integrity and charisma. He was a paradigm shifter and was able to add comparative advantages in all undertakings.
I firmly believe that, if we give a man a fish we feed him a day, but if we show the man HOW to fish then we feed him a life time. This is exactly what this corporate Chef did: empower and make the worker the custodian of a bigger goal. Develop and empower the individual, Raise the industry delivery standards and invoke a noble era for the country.When the employee is trusted, respected and listened to, on an on-going basis - that process helps in the worker developing a bond and a positive reputation of the employer / manager. This creates a positive guest experience.
In Human capital management, the creation and management of an egalitarian workforce is important. The tone from the top creates the culture that cascades to the very bottom.Once the collective work force recognizes their innate skills and then they are made aware they operate from within an egalitarian structure they assume more responsibility and efficiency ratios increase. The higher bang for the buck is driven by manager-skill. In culinary parlance, it’s the “secret sauce” that will make the signature dish, the talk of the resort that gets the traction. The key ingredient is the manager reputation based on charisma and integrity. Success is contingent upon the strategic policies developed by the manager.
Beyond the bounds of managing the human capital, EVA is a reflection of the managers skill and strategy development ability to optimize on increasing shareholder value and justify the Investors opportunity cost. Higher the EVA, higher the stock valuation. More and more organizations use EVA as a guideline for rewarding the Managers and workers. Higher the EVA, higher the rewards.
As a parting comment, in 1981, Sirisena and Wahab of the prestigious Mount Lavinia Hotel were ahead of the times when they expected their people to be charismatic and of high integrity. These words are more appropriate in today’s context where integrity is a mere word in the absence of charisma.
Upul Arunajith Upul holds a Ceylon Hotel School Diploma. He has worked at Taj Samudra Hotel, Aitken Spence Hotels and Mount Lavinia Hotel. After migrating to Canada, he made the transistion from hotels to finance, when he joined the ABN Amro Bank, whilst studying in pursuit of a career in derivatives. Currently, he overlooks the business and trading operations at Zen Capital. |
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