can eva create value?

245 Pages·2012·8.25 MB·English

™
CAN EVA CREATE VALUE?
A DYNAMIC LONGITUDINAL
INVESTIGATION OF
THREE NEW ZEALAND COMPANIES

Josephine Anne McLaren

Thesis submitted for the degree of Doctor of Philosophy
Newcastle University Business School
October 2012
Abstract
When Economic Value Added (EVA™) was first promoted by the patent-holders, Stern
Stewart and Company, it was hailed as an innovation in management accounting. The
suggestion was that this measure could be used as the basis for the management control
system within the firm, covering planning, control, investment decision making and
remuneration determination. Many firms introduced the EVA system. New Zealand, in
particular, was exposed to the EVA methodology through the publication in 1996 of a
Value-Based Reporting Protocol that was recommended for state-owned enterprises.

This study adopts a longitudinal perspective to examine the experience of three large
companies in New Zealand, who implemented EVA in the late 1990s. These companies
are ex-nationalised firms; two are state-owned enterprises and one is listed. The firms
implemented EVA in the late 1990s and continued to use it as the management control
system for a period of 10-15 years. The evidence is gathered from a questionnaire
conducted in 1999, interviews conducted in 2001 and 2011, and supporting
documentary evidence. It covers the entire ‘life cycle’ of EVA, from initial
implementation, through its evolution to the eventual decline.

Three different theoretical frameworks are developed from three academic disciplines
and applied in an original context to analyse this EVA evidence. The first is the
discovery theory framework, drawing from the economics literature base. This
framework is used to consider whether EVA can be regarded as a discovery process
within the organisation, to discover the source of value that is known to exist in these
ex-nationalised firms. The second, from the management literature, is used to
investigate whether EVA can be viewed as a management model in the firm. Finally,
contingency theory as applied in management accounting is extended to a longitudinal
perspective to analyse the variables that were important at each stage of the EVA life
cycle. A central theme of each framework was the information provided and the
incentives created by the measure.

The thesis provides original contributions to the evidence on EVA, including why EVA
needed to evolve and why it eventually failed. Further contributions are the suggestions
for development and extension of each framework and the synthesising of the
frameworks. Finally, implications for practitioners and policy makers are considered.
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Acknowledgements

First of all, I should like to acknowledge my supervisor, Professor Falconer Mitchell
from Edinburgh University. He first came to Newcastle University a number of years
ago, to talk about applying for CIMA grants. This led to two successful applications,
meaning that I could undertake my work on EVA and make two visits to New Zealand
to visit the companies and conduct the interviews. Professor Mitchell has provided
excellent support through the writing of the thesis and his invaluable contribution is
gratefully acknowledged. Secondly I should like to thank Professor Tony Appleyard,
who has provided continuous professional and personal support since I first became an
academic. He read and commented on the entire PhD, contributing particularly to the
discovery theory chapter, which could be regarded as a joint collaboration. My
colleagues at Newcastle University have also been encouraging, especially Dr Lana Liu
and Professor David Oldroyd (now at Durham University). Finally and most
importantly, I should like to thank my family, especially Tony and my sons Tom (for
his IT assistance) and James, my mother and my late father Professor Keith Syers, for
believing in me and encouraging me to complete. This thesis is dedicated to them.

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Table of Contents

List of Tables ...................................................................................................... viii

List of Figures ....................................................................................................... ix

List of Abbreviations ............................................................................................. x

Chapter 1. Introduction .................................................................................... 1
1.1 Introduction ...................................................................................... 1
1.2 The EVA Phenomenon ..................................................................... 1
1.3 Literature from the EVA Promoters ................................................. 3
1.4 Academic Literature ......................................................................... 4
1.5 Comments on the Literature ............................................................. 8
1.6 Implications for Research ................................................................. 9
1.6.1 Research Method ................................................................ 9
1.6.2 The Longitudinal Perspective ........................................... 10
1.6.3 Interpreting the Evidence ................................................. 10
1.6.4 Criticisms of the Management Accounting Perspective ... 10
1.6.5 Using a Variety of Theories ............................................. 11
1.7 The Research Questions and the Theoretical Frameworks
Employed ........................................................................................ 12
1.7.1 Research Questions .......................................................... 12
1.7.2 Gathering the Evidence .................................................... 12
1.7.3 The Theoretical Frameworks ........................................... 13
1.8 Introduction to the Case Study Companies .................................... 20
1.8.1 Size of the Companies ...................................................... 21
1.9 Summary......................................................................................... 24
1.10 Structure of the Thesis .................................................................... 25

Chapter 2. Economic and Accounting Context ............................................. 26
2.1 Introduction .................................................................................... 26
2.2 The Regulatory Environment in New Zealand ............................... 27
2.2.1 The Commerce Commission ............................................. 27
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2.2.2 The State-Owned Enterprises Act .................................... 27
2.2.3 The Crown Ownership Monitoring Unit (COMU) ........... 29
2.2.4 The Accounting Standards Review Board ........................ 30
2.3 Contextual Information on the Case Study Companies ................. 30
2.3.1 Airways Corporation of New Zealand (Airways) ............. 30
2.3.2 New Zealand Post (Post) .................................................. 31
2.3.3 Telecom Corporation of New Zealand (Telecom) ............ 32
2.3.4 Management Accounting Issues ....................................... 33
2.3.5 Empirical Hypotheses Relating to Business Strategy....... 35
2.4 Accounting Context ........................................................................ 35
2.4.1 Commitment to the EVA Philosophy ................................ 35
2.4.2 Publication of EVA Results .............................................. 35
2.4.3 The Components of EVA for Airways ............................... 39
2.5 Conclusions .................................................................................... 43

Chapter 3. EVA as a Discovery Process ........................................................ 45
3.1 Introduction .................................................................................... 45
3.2 Framework for Evolution ............................................................... 47
3.2.1 Evolutionary Theory ......................................................... 47
3.2.2 Consequences of the Evolutionary Process ..................... 49
3.3 The Stern Stewart Methodology ..................................................... 55
3.3.1 The Measurement of EVA ................................................. 53
3.3.2 The Theoretical Case for EVA as a Value-Adding
Metric ............................................................................... 54
3.4 Key Influences for the Discovery of Value .................................... 57
3.3.1 Incentives .......................................................................... 57
3.3.2 The Information Provided by the EVA System ................. 60
3.5 Complementary Systems: The Balanced Scorecard as Part of
the Process ...................................................................................... 62
3.6 Factors Inhibiting EVA as a Discovery Process............................. 63
3.7 The Research Evidence .................................................................. 65
3.7.1 The Research Method ....................................................... 65
3.7.2 Empirical Evidence .......................................................... 67
3.8 Discussion and Conclusions ........................................................... 89
3.8.1 Summary by Company ...................................................... 89
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3.8.2 EVA as a Discovery Process ............................................ 90
3.8.3 The Framework Employed ............................................... 91

Chapter 4. Can Accounting Inform Management? Management
Accounting and Management Models ........................................ 93
4.1 Introduction .................................................................................... 93
4.2 What is a Management Model? ...................................................... 95
4.2.1 Understanding the Differences between the Business
Model and the Management Model .................................. 95
4.2.2 Three Management Models .............................................. 96
4.3 Applying the Birkinshaw and Goddard Theoretical Framework
to the Stern Stewart Measure of EVA .......................................... 100
4.3.1 Managing Objectives ...................................................... 100
4.3.2 Motivating Individuals ................................................... 101
4.3.3 Coordinating Activities .................................................. 102
4.3.4 Making Decisions ........................................................... 104
4.3.5 Summary ......................................................................... 105
4.4 Empirical Evidence ...................................................................... 105
4.4.1 Results from Company X ................................................ 106
4.4.2 Results from Company Y ................................................ 112
4.4.3 Results from Company Z ................................................ 116
4.4.4 Summary of the Evidence ............................................... 118
4.5 Discussion and Conclusions ......................................................... 121

Chapter 5. A Dynamic Contingency Model of EVA ................................... 123
5.1 Introduction .................................................................................. 123
5.2 Developing the Dynamic Contingency Framework ..................... 125
5.2.1 Contingency Variables Identified in the Literature ........ 126
5.2.2 Employing the Contingency Framework ........................ 131
5.3 Developing the Research Propositions ......................................... 132
5.3.1 Implementation of the EVA System ................................ 132
5.3.2 Evolution ........................................................................ 135
5.3.3 Decline ........................................................................... 136
5.4 Research Methods and Empirical Evidence ................................. 137
5.4.1 Research Methods .......................................................... 137
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5.4.2 Background Information on the Companies .................. 139
5.4.3 Analysis of the Evidence ................................................. 141
5.5 Discussion of Results ................................................................... 165
5.6 Conclusions .................................................................................. 169

Chapter 6. Conclusions ................................................................................. 173
6.1 Conclusions on EVA from the Discovery Process Framework ... 175
6.2 Conclusions on EVA from the Management Model
Framework .................................................................................... 176
6.3 Conclusions on EVA from the Contingency Theory
Framework .................................................................................... 178
6.4 Contributions of the Study............................................................ 180
6.4.1 Contributions to the Theoretical Frameworks ............... 180
6.4.2 Insights from the Holistic Approach .............................. 182
6.4.3 Contributions to our Understanding of EVA .................. 184
6.5 Implications of the Research ........................................................ 188
6.5.1 Implications for Practitioners ........................................ 188
6.5.2 Implications for Policy Makers ...................................... 189
6.6 Further Developments of the Research Methodology .................. 190

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Appendix A. Pilot questionnaire issued in 1999 ................................................. 191

Appendix B. Extract from Post’s annual report 1999, illustrating
the use of EVA ............................................................................. 200

Appendix C. Airways’ EVA statements published in the annual report
and accounts, 1999 ....................................................................... 201

Appendix D. Extract from a presentation to employees regarding the
EVA performance incentive scheme, Company X,
2000-2001 ..................................................................................... 211

Appendix E. Extracts from Company Z annual incentive plan
guidebook, 2000/2001 .................................................................. 214

References ............................................................................................................ 218

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List of Tables

Table 1.1 Summary of the three theoretical frameworks .................................... 18
Table 1.2 Operating revenue for the companies (NZ$ million) and
New Zealand retail sales (NZ$ million), sales growth, GDP
(NZ$ million) and GDP growth for the period 1998-2010 ................. 22
Table 1.3 Operating revenue as a percentage of New Zealand retail sales for
the period 1998-2010 .......................................................................... 22
Table 1.4 Operating revenue as a percentage of New Zealand GDP for
the period 1998-2010 .......................................................................... 23

Table 2.1 Published EVA for the period 1998-2010 (NZ$000) .......................... 38
Table 2.2 NOPAT (NZ$000), WACC and capital (NZ$000) for Airways for
the period 1998-2010 .......................................................................... 40
Table 2.3 WACC calculations for Airways for the period 1998-2010 ............... 42

Table 3.1 Summary of the evidence .................................................................... 87

Table 4.1 Four management models in the Birkinshaw and Goddard
Framework .......................................................................................... 99
Table 4.2 Summary results for the case companies .......................................... 119

Table 5.1 Summary information on respondents .............................................. 138
Table 5.2 Summary information on the micro-study companies ...................... 139
Table 5.3 Life cycle of EVA ............................................................................. 142
Table 5.4 Motivations for EVA implementation............................................... 143
Table 5.5 Reasons for initial evolution: information provided by EVA ........... 146
Table 5.6 Reasons for secondary evolution: incentives created by EVA ......... 149
Table 5.7 Reasons for the decline in EVA use .................................................. 153
Table 5.8 Relevant contingency variables at each stage of the EVA life
cycle .................................................................................................. 163
Table 5.9 Average cash balances for the years 2000-2002 and 2008-2010
(NZ$000) ........................................................................................... 168

Table 6.1 Summary of the key features of the three theoretical frameworks ... 184
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List of Figures

Figure 1.1 Schematic representation of the theoretical frameworks used to
interpret the EVA evidence ................................................................. 19

Figure 3.1 Framework for the process of the discovery of value through the
introduction of EVA ............................................................................ 52

Figure 4.1 Diagrammatic representation of the Birkinshaw and Goddard Model
for the case study firms ..................................................................... 120

Figure 5.1 Model illustrating the relevant contingency variables and their
interactions ........................................................................................ 164

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