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 to create wealth they mustearn more than the cost of supplied funds and proposed profit as theresidual income accruing to a firm’s owner as a return to the investment of hisown capital and to the pains he suffers in exercising his ‘business power’ inplanning, supervision and control. Marshall eloquently captures the essence of economicprofit by stating that, “When a manis engaged in business, his profits for the year are the excess of his receiptsfrom his business. The difference between value of stock of the plant,machinery etc., at the end and beginning of the year is taken as part of hisoutlay, accordingly as there has been an increase or decrease of value.
Whatremains of his profits after deducting interest on his capital at the currentrate, is generally called his earnings of the undertaking or management” (Marshall, 1890; Abate & Grant, 2004). 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.nyu.edu/~adamodar/New_Home_Page/invfables/eva.html).