From EVA to ROIC: swapping the yardstick for judging businesses over twenty years (1999)

The better the metric, the longer it delays its own re-examination

At the centre of this decision is that the company swapped out, by its own hand, the very yardstick by which a business is measured. The EVA that Kao introduced ahead of its peers as a Japanese operating company in 1999 was backed by a record of twenty-two straight years of profit growth, and it took root deep in the organisation as a discipline that questioned the cost of capital. But it can be seen that its very rationality and the success it delivered also, in turn, slowed any move to re-examine the premises. The better the metric, the more the organisation takes to it and the harder it becomes to see a reason to doubt it — Kao’s path from EVA to ROIC seems to mirror that paradox.

Seen another way, reworking a yardstick used for more than twenty years to fit the time-horizon of long-term investment is also an expression of having come to grasp the metric as a means rather than an end. For Kao, which had fixed business conversions through capital investment and retreats through personnel, both in forms that permit no going back, the choice to swap out the yardstick of management is likewise an irreversible move that resets the very standard of judgment. By what measure, and in what proportion, to balance ESG’s long-term investment against the short time-horizon of the capital market is likely to be the next touchstone by which the yardstick switched to ROIC will be tested.