2nd Annual MVA Ranking.

These days, assessing CEO performance goes beyond qualitative measures like visionary leadership and managerial panache to the bottom line: creating wealth for shareholders. The ultimate performance scorecard, standardized Market Value Added (MVA) rankings show which rainmaking CEOs have done well by their investors-- and which might more aptly be dubbed wealth destroyers.

Corporate political correctness demands nowadays that all CEOs pay proper obeisance to the objective of creating shareholder wealth. But how well are each of them doing at achieving that oft-professed goal, and how do they each stack up against their peers? Here, in Chief Executive's second annual ranking of CEOs on the basis of how much wealth they've created for shareholders, are the answers.

The rankings cover the 1,000 largest U.S. corporations on the basis of market capitalization. They provide powerful affirmation of the stellar jobs done by the very best CEOs, but raise serious questions that boards of directors ought to be asking about some of the others. They also reconfirm some basic shifts in the economic landscape and suggest that the importance of the so-called new economy is even greater than generally acknowledged.

The rankings are based on a measure called market value added (MVA), which is the difference between the market value of a company and the capital contributed by all investors in the form of paid-in capital, retained earnings, and loans. As such, MVA is the stock market's assessment of the dollar amount by which a company has added to or subtracted from the wealth entrusted to it by investors. The change in MVA from one point to another is the amount of wealth creation or destruction during that period.

In the tables beginning on page 50, Chief Executive and Stern Stewart have ranked CEOs on the basis of the change in MVA over the period each has been in office. However, because MVA is a dollar measure rather than a rate of return, simply using the change in absolute MVA would be unfair. CEOs of the very largest companies would tend to wind up at the top or bottom of the ranking largely due to size alone. To correct for this and enable direct comparisons between, say, Charles Morgan of Acxiom ($465.1 million in 1998 revenues) and John Chambers of Cisco Systems ($8.46 billion in 1998 revenues), Stern Stewart has standardized" the changes in MVA by scaling them according to the amount of capital each company had when the incumbent CEO took office (see box, this page). Morgan, by the way, ranked No. 40 at the end of 1998 while Chambers was No. 44.

Comparisons remain imperfect, of course. For one thing, the chief executives in the ranking have tenures that vary from just one year to more than 30. Those who have been in office longer should rank higher, for the simple reason that (No. 2) and Michael Dell (No. 5), would remain in place.

Even with those caveats, changes in MVA and standardized MVA are by far the best way to appraise the relative performance of companies and management teams. Changes in MVA are even better than total returns, which suffer from the fact that they must be "risk-adjusted" in order to compare companies in different industries or with different capital structures. A great total return for an electric utility, for example, would seem pretty anemic in Silicon Valley. Performance assessments based on conventional accounting data are even less reliable, partly because of inescapable anomalies that exist within generally accepted accounting principles, and partly because of the latitude that companies still have to manipulate numbers within GAAP. (For more detailed statistics, including a complete Economic Value Added (EVA) analysis visit CE's web site at www.chiefexecutive.net.)

There wasn't a lot of roiling in the rankings in 1998. Like Ebbers and Gates, most of those near the top in the first ranking--for yearend 1997, published in the April '99 issue of CE--stayed at the top. The biggest movers were Yahoo!'s Timothy Koogle, up from No. 12 to No. 3, and Stephen Case of AOL, up from No. 14 to No. 4.

The strongest message that comes through from the new ranking is the incredible share of wealth creation accounted for by the new economy. Since the standardized ranking puts the "comers" on an equivalent footing to old-line giants like GE, it shows most dramatically where new wealth is being created, at least as far as stock-market investors are concerned. Of the top 25 CEOs in the new ranking, fully 15 run computer-related hardware, software, and Internet companies. Another five are CEOs of telecommunications companies, and three run medical companies.

Similarly, the ranking confirms that some "troubled" industries really have been going through hard times of late. Very few transportation companies, forest products producers, and natural resource companies make it anywhere near the top ranks, but heavily populate the nether regions of the ranking. One surprise is the comparatively mediocre performance of the supposedly glamorous media and entertainment industries. They have just one CEO each in the top 100: David Wetherell of CMGI at No. 23 and Michael King of King World at No. 63.

As revealing as the industry rankings are, they also put the lie to the popular presumption that industry is destiny. Herbert Kelleher, head of Southwest Airlines and the 1999 Chief Executive of the Year, comes in at a respectable 142 in standardized MVA (and 174 in absolute MVA). Nor is being in a hot business any guarantee of success, as evidenced by Brian Halla of National Semiconductor (No. 857) and Wilfred Corrigan of LSI Logic (No. 901).

Al Ehrbar is senior VP of Stern Stewart & Co., a New York-based consulting firm. The CEO names and start dates used to compute MVA data were provided by individual firms and Compustat.

  THE TOP OF THE BARREL: the 25 who created the most wealth for shareholders
'98 '97
STD STD
MVA MVA NAME                   COMPANY
 1   1  Bernard J Ebbers       WorldCom
 2   2  William H. Gates III   Microsoft
 3  12  Timothy A. Koogle      Yahoo!
 4  14  Stephen M. Case        America Online
 5   9  Michael S. Dell        Dell Computer
 6   7  Rodger B. Dowdell Jr.  American Power Conversion
 7   4  L. L. Mays             Clear Channel Communications
 8   -  Robert J. Davis        Lycos
 9   5  Done A. Miller         Blomel
10   3  Charles B. Wong        Computer Associates
11  25  Richard M. Schulze     Best Buy Co.
12   -  Kobi Alexander         Comverse Technology
13   6  Michael J. Brick       Tellabs
14  213 Robert D. Walter       Cardinal Health
15  16  Ralph J. Roberts       Comcast
16  17  Roger W. Roberts       Citrix Systems
17  10  John E. Keane          Keane
18  27  William L. Larson      Network Associates
19  15  James C. Morgan        Applied Materials
20   -  Charles M. Brewer      MindSpring
21  24  Mark J. Leslie         VERITAS Software
22  22  Robert H. Swanson, Jr. Lineor Technology
23   -  David S. Wetherell     CMGI
24  36  Howard Solomon         Forest Laboratories
25  37  Scott G. McNealy       Sun Microsystems
'98
STD
MVA                INDUSTRY
 1            Telecommunication
 2         Computers & Software
 3         Computers & Software
 4         Computers & Software
 5         Computers & Software
 6                  Electronics
 7            Telecommunication
 8         Computers & Software
 9           Medical/Healthcare
10         Computers & Software
11  Apparel/Retail/Distribution
12            Telecommunication
13            Telecommunication
14           Medical/Healthcare
15            Telecommunication
16         Computers & Software
17                     Services
18         Computers & Software
19         Computers & Software
20         Computers & Software
21         Computers & Software
22         Computers & Software
23                        Media
24           Medical/Healthcare
25         Computers & Software
       THE BOTTOM OF THE BARREL: the 25 who created the least wealth
'98 '97
STD STD
MVA MVA NAME                   COMPANY
880 882 Vincent Camuto         Nine West
881 889 Philip G. Satre        Horrahs Entertainment
882  -  Robert E. Rose         Global Marine
883 893 Charles E. Hurwitz     Maxxam
884 57  George N. Hatsopoulos  Thermo Election
885 565 Fronk N Liguorl        Olsten
886  -  George. D. Johnson Jr. Extended Stay America
887  -  Paul W. Whetsell       MeriStar Hospitality
888  -  Steven J Lund          Nu Skin Asia Pacific
889 896 Thomas J. Bill         Fore Systems
890 885 William C. DeRusha     Heling-Meyers
891 453 Michael. R. Walker     Ganesis Health Ventures
892 268 Robert J. Ratliff      AGLO
893 320 Scott D. Sheffield     Poineer Natural Resouces
894  -  Joseph R. Ettore       Ames Department Stores
895 665 Andrew L.Turner        Sun Healthcare Group
896 206 Sanford Miller         Budget group
897 176 Lorry House            MidPartners
898 138 Felix Zondman          Vishay Intertechnology
899 120 Bob Levine             Cobletron System
900 891 Robert N. Elkins       Integrated Health Services
901 110 Wilfred J. Corrigan    LSI Logic
902 114 Sal. H. Alfiero        Mark IV Industries
903  -  Alex J. Mandl          Teligent
904  -  Alan R. Hoops          Pacificare  Health Systems
'98
STD
MVA                     INDUSTRY
880  Appreal/Retail/Distribution
881        Leisure/Entertainment
882     Natural Resources/Metals
883        Paper/Forest Products
884                Manufacturing
885                     services
886        Leisure/Entertainment
887        Leisure/Entertainment
888            Consumer Products
889          Computer & Software
890  Apparel/Retail/Distribution
891           Medical/Healthcare
892                Manufacturing
893     Natural/Resources/Metals
894 Appearel/Retail/Distribution
895           Medical/Healthcare
896                Transporation
897           Medical/Healthcare
898                  Electronics
899         Computers & Software
900           Medical/Healthcare
901         Computers & Software
902                        Autos
903            Telecommunication
904           Medical Healthcare

Why We Use Standardized MVA

MVA, or market value added, is the basis for this performance ranking of chief executives. Developed by Stern Stewart & Co., MVA is the best measure available of the amount of wealth a company has created for its shareholders. Conceptually, MVA is a company's market value (debt and equity) minus all the capital contributed over the years by shareholders and lenders. It represents the difference between "cash out"--what they could get by selling at today's prices--and "cash in"--what investors have contributed. If MVA is positive, cash out is greater than cash in and a company's management team has created wealth; when MVA is negative, it has destroyed wealth.

MVA measures the wealth a company has created since its inception. To get a better fix on how individual CEOs have performed for shareholders, Stern Stewart calculated the change in a company's MVA, or what it calls delta MVA, from the time the incumbent CEO took office until the end of last year. In most cases, the starting MVA is the figure for the beginning or end of the year the CEO got the top job, depending on whether the appointment was in the first or second half of the year. In some cases, however, the start date is either the end of the year in which a company held its IPO or, for long-tenured CEOs, the end of 1978, the earliest date for which Stern Stewart has MVA data. Figures on delta MVA were calculated for all CEOs who took office before June 30, 1998, and were still at the helm at the end of that year.

Chief Executive and Stern Stewart have made a second refinement to the raw MVA data to better compare the performances of individual CEOs: dividing the change in MVA by the amount of capital a company had when the CEO took office rather than simply looking at the delta MVA. This variation, referred to as the change in "standardized" MVA, adjusts for the relative size of different companies and "scales" the changes in MVA, providing a measure of the efficiency with which each chief executive used the capital at his or her disposal.

If the figure for the change in standardized MVA is, say, 1.50, it means that MVA has risen by $1.50 for each dollar of capital that the company had when the CEO took office. The rankings in the accompanying tables are given first in order of change in standardized MVA, with the rank for absolute changes in MVA second. The other entries in the tables are the name of the CEO, the yearend closest to the actual month he or she took office--the start date--the company's MVA at the end of 1998, the MVA at the start date, the change in absolute MVA and, finally, the change in MVA expressed as a ratio to beginning capital.

These changes in standardized MVA range from a staggering $18,602 for Bernard Ebbers at WorldCom (up from $3,026 a year before) to minus $255 for Alan Hoops at Pacific Health Systems. Hoops and some 39 other CEOs have declines in standardized MVA of 1.0 or more, which means they share the ignominious distinction of having destroyed more wealth than they started out with.

The median for the CEOs at the 1,000 largest U.S. firms was about 1.20 at the end of 1998, which was, down slightly from 1.31 at the end of 1997. Why the drop? Mostly because 1998 was a wildly anomalous year in which a handful of large companies shot up in value while most stock prices actually declined. As an example, the aggregate MVA of the Stern Stewart Performance 1000 rose by $2.2 trillion in 1998, but more than half that gain came at the 20 largest companies (just 2 percent of the total), while the top 100 accounted for virtually all the increase in MVA.