A VBM initiative should pursue three objectives, according to Olsen. First, it should work to increase returns from existing assets. Second, it needs to help senior management make incremental investments that have rates of return above the company’s cost of capital. And third, it should free up cash and return it to investors when profitable investments are not available.
Measures that do not incorporate all three dimensions will bias decisions or behavior and will not link well with TSR [total shareholder return] performance. Commonly used measures like ROE [return on equity], earnings, RONA [return on net assets] and EVA are, in fact, biased because they don’t accurately reflect all three of those drivers of value creation.