Economic Value Added EVA Business Model Is it

Economic Value Added (EVA) Business Model: Is it Sustainable ? o Dr. Lim Mah Hui o INTI College, Penang o July 21, 2012 1

Introduction o What’s the raison d’etre of a firm or company? o Experience of EVA workshop 2

EVA Model o Maximization of Returns to Shareholders o EVA = (r-c). K = (rate of return – cost of capital) x capital employed OR o Maximize NPV of FCF ( Net Present Value of Free Cash Flow) o 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 o Banks become NON-LENDING banks o o 4

EVA o Relate experience in Indonesia during the Asian Financial Crisis o Banks withdrew from lending to SMEs o Concentrate on foreign exchange trading o Banks, companies focused on short term gains rather than long term growth 5

Banks – systemic crisis o 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 o Methodological flaw in which understanding of and conclusion on an economic or social fact is based on analysis of its individual components o Rational Expectation Theory in Economics o But the whole is > sum of its parts 7

Fallacy of Composition o Each individual or part acting to maximize its self interest instead of contributing to collective good can lead to systemic dysfunction 8

Examples o Keynes Paradox of Savings o Tragedy of Commons o Jobless Growth 9

Business Ethics and CSR o Icing on the cake o Cant create responsible business when over-arching value and principle is maximize profits at all costs o Reward and performance structure more powerful than “individual morality” o Cant depend on business to self regulate esp with externalities 10

Role of State (government) o State not only to provide legal, social and physical infrastructure for business o Role of state also to regulate, to provide checks and balance, to guard social interest o Mega trend of 21 st century – relationship btw state and market 11

Externalities –definition and examples o Action of private actor’s benefit individual but generate social and economic costs that are passed on to society o Manufacturing industry – pollution o Banking industry – over leverage and lending > financial crisis and tax payers carry costs of bail out 12

Externalities – Housing Industry o Property construction industry developers profit maximization – build to maximum density causing traffic congestion o Hill slope cutting causing erosion o Housing treated as means of investment and speculation rather than consumption (living) o Create international demand 13

Externalities o Impact on domestic prices – house price increase outstrip wage increase > unaffordability o 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 o Social Enterprise o Consider other stake holders o Socially Acceptable Rate of Return (SARR) rather than EVA o Job creation and job satisfaction o Employees have say in business o Workers participation in production 15

o THANK YOU 16