The debate on EVA continues, with ISS publishing a sharp response to Pay Governance’s previously reported study on EVA’s poorly defined correlation to TSR. Recognizing that EVA is vulnerable to certain criticisms, ISS notes that it is not possible for Pay Governance to evaluate EVA because they cannot calculate it without ISS’s proprietary methods – which is exactly the challenge companies are facing when considering ISS’s use of the metric. ISS states that EVA is not complex to those that understand it and to companies that use it, but again, that seems to be part of the problem. Not many companies use it, nor is it widely used in the investing community to evaluate performance. ISS also believes it problematic to attempt to correlate EVA with TSR, claiming, “EVA critics are also putting too much emphasis on correlations with TSR as a deciding factor. In fact, ISS chose to use EVA because the metrics are expected to complement TSR and not primarily because of a correlation with it.” While it is certainly true that TSR is not a perfect metric by any means, it seems odd that ISS, which uses TSR almost exclusively to define performance, would now complain about attempting to correlate EVA with TSR!
- EVA-based metrics will not improve the comparability of company performance.
- EVA is not a standardized or widely used measurement. Further, ISS is utilizing a proprietary method, so it will ultimately be opaque to report readers.
- EVA relies heavily on cost of capital but that value tends to vary widely based on calculation methods and data inputs, including basic inputs such as the market risk premium or the risk free rate.
- EVA may reward short-term corporate planning. It penalizes companies that are investing heavily in R&D and growth but have not yet seen those returns mature, punishing efforts to create value over the long-term and address investor concerns about sustainability.