Joel Stern is a name synonymous with economic value added (EVA), a financial performance metric that gained significant traction in the late 20th century and continues to influence corporate finance thinking today. His contribution lies primarily in popularizing and refining the concept, transforming it from an academic theory into a practical tool for corporate management and investment analysis.
Stern’s career began at the University of Chicago, a hotbed of financial innovation, where he taught finance. However, he is best known as the co-founder, along with G. Bennett Stewart III, of Stern Stewart & Co. (now Stern Value Management). This consulting firm was instrumental in promoting EVA and its implementation across various industries and companies. The core idea behind EVA is elegantly simple: a company creates value only when its profits exceed its cost of capital. In essence, it focuses on whether a company is earning enough to compensate its investors for the risk they are taking.
Before Stern, traditional accounting measures like net income and earnings per share were heavily relied upon to assess corporate performance. However, these metrics often failed to adequately reflect the true economic profitability of a business. Stern argued that these measures were susceptible to accounting manipulations and didn’t properly account for the cost of capital employed. EVA, in contrast, provides a more comprehensive view of value creation by explicitly deducting the opportunity cost of capital from operating profit. This helps to reveal whether a company is truly generating wealth for its shareholders or simply returning their investment.
Stern’s work extends beyond the calculation of EVA itself. He championed its use as a framework for strategic decision-making, performance management, and executive compensation. He advocated aligning employee incentives with EVA performance to ensure that everyone in the organization is focused on creating shareholder value. This meant moving away from rewarding management solely on revenue growth or cost-cutting and instead tying compensation to the actual creation of economic profit.
The impact of Joel Stern’s work has been significant. Numerous companies, including Coca-Cola and Quaker Oats, adopted EVA-based management systems. While the initial enthusiasm for EVA has cooled somewhat over time, its underlying principles have been integrated into many other value-based management approaches. The emphasis on cost of capital and the alignment of incentives with shareholder value remain critical components of modern corporate finance thinking. Even though other metrics may be used, the emphasis on creating value above and beyond the cost of capital, something Joel Stern tirelessly advocated for, continues to shape how companies are analyzed and managed today. His legacy lies in pushing businesses to think critically about true profitability and to align their actions with the long-term interests of their shareholders.
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