EVA is a company's net operating profit minus an appropriate "charge" or the capital required to produce the profit. EVA is a form of what economists call residual income, meaning that it is a measure of the profit that remains after earning a required minimum rate of return on capital.

The "charge" for capital employed is the most distinctive aspect of EVA. Under generally accepted accounting principles, a company may appear to be profitable, but may in fact be destroying value by earning a profit below the opportunity cost of capital. EVA corrects for this illusion by explicitly recognizing that when managers choose to employ shareowners capital, they must pay for that use through a charge just as in the case of wages necessary to produce profit. This charge is the opportunity cost of capital that is the minimum return shareowners must earn on the capital to compensate for the risks assumed in generating the profit.

Although conceptually simple, EVA is a sophisticated tool that provides highly accurate estimates of both capital used and a firm's true cost of capital. Unlike traditional financial measures, EVA allows all decisions to be clearly modeled, monitored, and communicated in terms of the value added to the shareowner's investment.

EVA was developed by Stern Stewart & Co. It is winning international acceptance as the standard of corporate governance and performance.

Corporate Governance Screen CalPERS commissioned the Investor Responsibility Research Center (IRRC) to provide an analysis of corporate governance structure criteria selected by CalPERS. These elements are weighted by CalPERS in determining its Focus List.