Publication Date

Spring 2006


School of Business


Business: Finance


Shareholders rely on accounting figures that do not indicate true performance and are known to be easily manipulated. Manager incentives, which are focused on these figures, must be changed in order to reward managers for honest corporate governance. The pursuit of corporate governance requires adjustments to internal reports and valuation methods. Economic Value Added (EV A) is a method that truly measures economic value and requires managers to return the cost of capital to lenders and shareholders. Some companies that have not required a minimum return from investment projects have gotten themselves into financial ruin arid even turned to corrupt behavior. Cases of cOl1uption involving Enron and Tyco will be analyzed with a focus on the reasons of corruption. Incentive plans utilizing EVA valuation standards will be discussed as solutions. EVA implementation will be proven to serve as a more accurate method of valuing a company's worth and manager performance. This will serve to deter dishonest practices and encourage managers for making decisions in the best interest of shareholders.