Beyond Profits: A Guide to Value-Based Metrics in Creating Shared Value

 

Creating Shared Value (CSV) is a concept that highlights the importance of businesses generating economic value in a way that also produces value for society. When considering which Value-Based Management (VBM) metrics to use in the context of CSV, it's essential to choose those that align with both financial performance and societal impact.

Economic Value Added (EVA)

EVA is a measure of a company's financial performance based on residual wealth. It calculates the value created beyond the required return of the company's shareholders. EVA is ideal for CSV as it focuses on true economic profit. It encourages companies to think beyond short-term financial gains and consider long-term value creation, which is crucial for societal benefits.

Market Value Added (MVA)

MVA is the difference between the market value of a company and the capital contributed by investors. High MVA indicates that the company has created substantial wealth for its shareholders. While MVA is an excellent indicator of shareholder value, its focus is more on financial outcomes rather than social impact. However, if aligned with CSV goals, MVA can encourage companies to invest in socially beneficial projects that also promise long-term financial returns.

EVA Spread

EVA Spread measures the difference between a company's return on invested capital and its cost of capital. A positive spread indicates that the company is generating value above its cost of capital. This metric can be particularly useful in CSV, as it can prompt companies to invest in projects with high social impact that also yield financial returns above the cost of capital.

Choosing the Right Metric

The choice of metric depends on the company's objectives and the nature of its CSV initiatives. For companies focusing on long-term societal impact alongside financial sustainability, EVA is often the most aligned metric. It encourages investment in projects that, while maybe not immediately profitable, have the potential to create significant social value and long-term economic returns.

In contrast, MVA is more suitable for companies with initiatives that have clear, quantifiable financial returns that also contribute to societal benefits. EVA Spread can be a middle ground, suitable for initiatives that are expected to outperform the cost of capital while delivering social benefits.

Conclusion

In conclusion, while each metric has its strengths, EVA stands out as the most aligned with the principles of Creating Shared Value. It pushes companies to look beyond traditional financial metrics and invest in areas that yield long-term societal and economic benefits. Ultimately, the choice of metric should support the company's overarching goals of balancing societal impact with financial viability.