Economic Value Added System Keeps Some Managers Focused Boosters say the system aligns managers' goals with the shareholders'.(LEADERS & SUCCESS)(MANAGING A SUCCESSFUL COMPANY)

Byline: CHRISTINA WISE

Investors sifting through the rubble of the 1990s market bubble are demanding more from their stocks these days -- mainly real profits. Not the sort spawned by accounting gimmicks, but solid, tried and true profits.

That's where value-based management techniques could come in handy. Their aim is to get managers to think like shareholders and to force them to put capital entrusted to them to the best use.

One of the big proponents of value-based management has been Stern Stewart & Co. In the 1990s, the consulting firm spread the gospel of its proprietary Economic Value Added (EVA) management system, attracting such high-profile followers as Coca-Cola Co. and Eli Lilly & Co.

The idea is simple: A firm's true profit is money it earns after factoring in its cost of capital. Known as an EVA score, the measure is calculated by multiplying the firm's operating capital by its after-tax cost of capital, then deducting the result from net operating profit after taxes.

For shareholders, it's the cost of capital part of the equation that separates it from traditional earnings measures. Though interest on debt is deducted on an income statement, the cost of equity capital is not.

That means a business may earn a profit on paper, but contribute nothing to the economy because it eats up shareholder value to do it.