Al Weatherhead, 73, can recall perfectly the board meeting he attended a few years ago at which one of his directors demanded he get rid of a big chunk of his company. The distribution arm of Weatherhead Industries, Prodco & Ashland Municipal Supplies in Cleveland was earning only an 8 to 9 percent return on capital, in contrast with the benchmark 12 percent.
"It's necessary for you to take corrective action," the director said. "Sell the thing!"
According to the Economic Value Added (EVA) performance measures Weatherhead had been given by New York City management consulting firm Stern Stewart & Co., the director's suggestion was the right one. So Weatherhead sold the distribution side of his business.
"That was one of the truly great benefits of EVA," Weatherhead says. Today he employs 150 people in the original business of plastic bottle cap manufacturing, and the company's revenue of approximately $25 million is up sharply from $15 million at the time of the divestiture in 1993.
A few years before Weatherhead's decision to divest, he had implemented EVA to help provide guidance to company managers. Hundreds of other companies, including such well-known organizations as Coca-Cola, Eli Lilly and Steelcase, have also adopted EVA-style measurement systems. And fans of this performance gauge include management guru Peter Drucker as well as the evangelists at Stern Stewart.
"[EVA] tells you whether you've been as skillful as you'd like to think," Weatherhead says. "It measures your true performance."
Mark Henricks is an Austin, Texas, writer who specializes in business topics and has written for Entrepreneur for nine years.