Mumbai, August 29, 2001                      

Godrej Consumer Products Limited (GCPL), Godrej Industries Limited (GIL) and their associated companies have completed the implementation of the EVA (economic value added)-based performance management system.

Announcing this, Mr Adi Godrej, chairman of the Godrej Group, said, “Implementing the EVA framework is a key business performance initiative in support of our efforts to evolve as a world-class organisation and enhance shareholder value.

"Our main objective behind implementing EVA is to be driven, measured and rewarded by our ability to create sustainable shareholder value."

The EVA framework has been implemented at Godrej over the past 10 months and has been facilitated by Stern Stewart & Company, the New York-based management consulting firm that pioneered the development of the EVA framework. Stern Stewart worked closely with three key teams at Godrej:

A steering committee — comprising the top management, including Mr A B Godrej and Mr N B Godrej as well as the business unit heads / directors — to make key policy decisions.

An implementation team — comprising Mr C K Vaidya, executive director (corporate personnel), Godrej Industries Limited, Mr S S Sapre, vice president (finance), Godrej Consumer Products Limited, and Dr S S Sindhu, general manager (personnel), Godrej Agrovet Limited — to monitor overall project progress, ensure organisation-wide coordination across the various business units and functions and achieve full knowledge transfer.

Cross-functional working teams, which were formed at each SBU, to ensure that the outcome of the project was tailored to meet specific business requirements.

The project involved four overlapping phases:

Performance measurement: As a financial measure, EVA is simply the operating profit after tax, less a charge for the capital used in the business. The measurement phase involved tailoring the EVA definition for each Godrej business to ensure a simple yet robust financial performance measure. The 'weighted average cost of capital' for most Godrej businesses has been set at 18 per cent after tax for FY ’01-’02. 'EVA centres' below the SBU level have also been identified.

Management processes: This phase involved integrating value-based thinking into the various management processes, and developing the relevant tools and framework to guide management in its strategic, operating and financing decisions to improve business EVA. The analysis of the historical and forecast EVA trends, and the peer benchmarking of Godrej Sara Lee and Godrej Consumer Products Limited, shows that both are very strong EVA performers relative to other leading Indian FMCG companies. The strategic planning process has been strengthened through value-based goal-setting techniques to better understand shareholders’ expectations and improved scenario planning. Sophisticated EVA-based capital investment tools have also been developed.

Commenting on these, Mr Adi Godrej said, “These tools will be very helpful in our strategy of making EVA-positive acquisitions to pursue value-creating, top-line growth. We are interested in growth, but not growth simply for the sake of size; it must result in increased shareholder value.”

Motivation: For some time now, the Godrej Group has had in place a variable compensation scheme linked to business performance. Previously, this was linked to sales and profit-before-tax (PBT) targets. A revised 'performance-linked variable remuneration' (PLVR) scheme has been designed to reward management teams for improving their businesses' EVA relative to shareholders' expectations. As per Stern Stewart’s recommended incentive architecture, the PLVR scheme has two key features to better align managerial behaviour with shareholders’ interests:

"Within the first quarter of the financial year 2001-02, Godrej Consumer Products Limited has reduced its working capital usage by more than Rs 23 crore. It is now operating on negative working capital, thereby substantially improving its EVA. It reported an EVA of Rs 6.5 crore in the first quarter of this year

"Although the 10-month formal project is complete, we will continue the EVA improvement and training initiatives on an ongoing basis.”

Godrej is amongst the handful of leading Indian adopters of the EVA framework. Other Indian companies who have adopted EVA are TCS and NIIT. Internationally, such shareholder value-based management approaches have been adopted very widely, including by prominent multinationals such as Bausch & Lomb, Cadbury, Diageo, Hershey Foods, Johnson & Johnson, Kao Corp, Quaker Oats, Siemens, Sony, Whirlpool and Unilever.

Many influential investors and independent experts have endorsed the EVA management system. A number of empirical studies have shown that companies that have successfully adopted the EVA framework have significantly outperformed peers in creating superior returns for shareholders.

Godrej Consumer Products Limited is a major player in the Indian FMCG market, with a presence in the personal, hair, household and fabric-care segments. With a turnover of RS 470 crore, the company employs 900 persons and has two modern manufacturing facilities, at Malanpur (in the state of Madhya Pradesh) and Silvassa (a union territory).

Godrej Industries Limited is a leading manufacturer of surface-active agents and oleochemicals. The company employs more than 1,500 people and has two modern manufacturing facilities, at Mumbai (Maharashtra) and Valia (Gujarat). Its associate companies include Godrej Sara Lee Limited, Godrej Foods Limited, Godrej Agrovet Limited and Godrej Properties and Investments Limited.

The Godrej Group is one of the largest industrial houses in India, with an annual turnover of RS 3,400 crore. It comprises several companies, such as Godrej & Boyce Mfg Co Ltd, Godrej Appliances LTD, Godrej Industries LTD, Godrej Consumer Products LTD, Godrej Foods LTD, Godrej Agrovet LTD, Godrej Telecom LTD, Godrej Sara Lee LTD, Godrej Properties & Investments LTD and Lawkim Ltd.