The UK Companies Act of 2006 and the Sarbanes‐Oxley Act of 2002: Implications for EVA^® (economic value added)

Abstract

Purpose

The purpose of this article is to investigate whether economic value added (EVA^®) is a superior financial performance metric and creates market value added (MVA), as claimed by Stern Stewart and Company, and therefore is consistent with the purpose and intent of the UK Companies Act of 2006 and the Sarbanes‐Oxley Act of 2002. If these claims can be sustained, then it could be argued that this valuation metric should form part of the Business Review, Section 417 of the UK Companies Act of 2006, and furthermore it could be an appropriate approach to the attainment of the corporate objective of the UK Companies Act of 2006, Section 172(1).

Design/methodology/approach

A survey was undertaken of journal articles published in mainstream academic journals from 1997 to 2008 that investigated the claims of Stern Stewart and Company that EVA^® was a superior financial performance metric vis‐à‐vis other well‐established accounting and financial metrics. As the empirical evidence in support of these claims was not compelling, the epistemology and methodology of EVA^® were examined, and were found to be deficient.

Findings

There is insufficient supportive evidence to validate the claims of EVA^®; furthermore, from the perspective of epistemology and sound research methodology it is not possible to make a robust case for the unqualified use of EVA^® in jurisdictions where the UK Companies Act of 2006 and the Sarbanes‐Oxley Act of 2002 apply. Directors who make unqualified use of this financial performance metric place themselves at unnecessary risk.

Originality/value

There is no evidence from the scrutiny of publicly available secondary sources to indicate that the implications of the UK Companies Act of 2006 and the Sarbanes‐Oxley Act of 2002, for the use of the financial performance valuation metric, EVA^®, has been previously undertaken or published.

Citation

Paulo, S. (2010), "The UK Companies Act of 2006 and the Sarbanes‐Oxley Act of 2002: Implications for EVA^® (economic value added)", International Journal of Law and Management, Vol. 52 No. 3, pp. 173-181. https://doi.org/10.1108/17542431011044625