Financial Control System of the Volkswagen Group

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1. Volkswagen Group's Financial Control System

The Volkswagen Group has shifted its focus from traditional financial metrics like profit margin, sales revenue, and profit before tax to more capital market-oriented variables such as 'Required Rate of Return' and 'Economic Value Added (EVA)'. EVA is calculated as the operating profit after tax minus the cost of capital, where the cost of capital is the weighted average of the cost of debt and the cost of equity. The cost of equity is determined by the risk-free interest rate, market risk premium, company-specific risk premium, and country-specific risk premium. The cost of debt is the average interest rate on long-term debt adjusted for the tax advantage. EVA represents the value created by the company and a positive net present value of discounted future EVA indicates an increase in the company's value.
2. Introduction of EVA and RARoC at Standard Chartered Bank

Several years ago, Standard Chartered Bank introduced two new metrics: Economic Value Added (EVA) and Risk Adjusted Return on Capital (RARoC). EVA reflects the capital resources employed locally that are controlled by country management, while also considering the impact of the offshore booking model. RARoC is a relative percentage return measure, conceptually similar to Return on Equity (RoE) but using a different methodology. The EVA hurdle rate sets the target level of RARoC which businesses should aim for. The bank's cost of capital comprises the expected returns by equity investors as a return for taking a risk over a fixed income investment, adjusted for central items like bank levy, corporate center costs, and group treasury costs.
3. Maximizing EVA at Standard Chartered Bank

Standard Chartered Bank introduced several ways for employees to maximize EVA, including growing value-accretive revenue, addressing the accessible wallet of clients in all geographies due to the income multiplier effect from deepening client relationships, reducing costs while improving client experience, and improving credit quality and managing risk appetite. To reduce the capital cost, the bank optimizes the risk-weighted asset usage as this drives capital consumption, and country management should manage their local capital efficiently with regular distributions.

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1. Volkswagen Group's Financial Control System

Volkswagen Group's financial control system is a critical component of the company's overall management and governance framework. The system is designed to provide robust financial oversight, ensure compliance with regulations, and support the company's strategic objectives. Key elements of the system include budgeting, forecasting, performance monitoring, and risk management. The system enables Volkswagen to make informed decisions, allocate resources effectively, and maintain financial discipline across its global operations. However, the system has faced challenges in recent years, particularly in the wake of the emissions scandal, which highlighted the need for stronger internal controls and greater transparency. Going forward, Volkswagen will need to continue to refine and strengthen its financial control system to regain the trust of stakeholders and ensure the long-term sustainability of the business.
2. Introduction of EVA and RARoC at Standard Chartered Bank

The introduction of Economic Value Added (EVA) and Risk-Adjusted Return on Capital (RARoC) at Standard Chartered Bank represents a significant shift in the bank's approach to performance measurement and capital allocation. EVA is a metric that measures the true economic profit generated by a business, taking into account the cost of capital employed. RARoC, on the other hand, is a risk-adjusted measure of profitability that helps the bank to make more informed decisions about where to allocate its capital. The adoption of these metrics has likely helped Standard Chartered to improve its financial discipline, optimize its capital structure, and enhance its overall competitiveness in the market. However, the implementation of such sophisticated performance management tools also requires a significant investment in data, analytics, and organizational capabilities. Standard Chartered will need to ensure that its employees are properly trained and incentivized to use these tools effectively, and that the insights generated are integrated into the bank's strategic decision-making processes.
3. Maximizing EVA at Standard Chartered Bank

Maximizing Economic Value Added (EVA) is a key strategic objective for Standard Chartered Bank, as it aligns the interests of the bank's management and shareholders by focusing on the creation of long-term shareholder value. To achieve this, Standard Chartered will need to adopt a holistic approach that encompasses several key elements: 1. Capital Allocation: The bank will need to carefully allocate its capital to the most profitable and value-creating business lines and projects, using tools like RARoC to inform its decision-making. 2. Cost Management: Reducing unnecessary costs and improving operational efficiency will be critical to improving the bank's EVA performance. 3. Revenue Growth: Identifying and capitalizing on opportunities for sustainable revenue growth, particularly in high-margin business segments, will be essential. 4. Risk Management: Effective risk management will be crucial to ensuring that the bank's returns are commensurate with the risks it is taking on. 5. Organizational Alignment: Ensuring that the bank's performance management systems, incentive structures, and decision-making processes are all aligned with the goal of maximizing EVA will be key. By focusing on these key areas, Standard Chartered can position itself to deliver superior financial performance and create long-term value for its shareholders.