Wealth creating CEOs: 1st annual MVA ranking.
Some chief executives are revered for their managerial panache; others are idolized for exercising truly visionary leadership. Still others receive accolades for their ability to keep a cool head in hot water. But which CEOs have actually created true, quantifiable wealth and value for their corporations? In today's knowledge economy of invisible intellectual capital, some might argue there is no way to truly quantify that wealth. But we at Stern Stuart and Chief Executive believe otherwise.
The rankings in this article are based on a concept known as market value added, or MVA. Stem Stewart & Co., which created the MVA concept, maintains that it is the definitive measure of corporate performance. MVA is the difference between the total market value of a company and the capital contributed by shareholders and lenders. In other words, it is the difference between "cash in" and "cash out" - between what investors put into a company as capital and what they could get out by selling at today's market price. As such, MVA is the cumulative amount by which a company has enhanced - or diminished - shareholder wealth.
In the most basic terms, MVA is simply market value minus book value. However, Stern Stewart makes a number of adjustments to accounting book values to derive a more accurate estimate of invested capital, or a true "economic" book value. The biggest adjustments typically are adding back previously amortized goodwill and, for research-intensive companies, capitalizing expenditures on R&D and amortizing them over five years. In virtually all cases, the figure for economic book value is higher - sometimes substantially - than accounting book value.
MVA is the best external measure of management performance because it captures the market's assessment of how effectively a company's managers have used the scarce resources under their control. MVA also reflects how well management has positioned the company for the long term, since market values incorporate the present value of expected long-run payoffs.
Unlike total returns to investors, which must be adjusted for the relative riskiness of different industries, MVA is automatically risk adjusted because the market values of companies incorporate investor judgments about risk as well as performance. This means MVA is a measure one can use to directly compare the performance of companies in different industries or different countries. MVA can be used to compare a bank to a consumer goods company or a steelmaker to a software company. The one with the higher MVA has created more wealth - period.
Most important, MVA is the ultimate goal in the wealth creation game. The overarching financial objective of every company should be to create as much shareholder wealth - as much MVA - as possible. As the late Roberto Goizueta of Coca-Cola described MVA several years ago: "It's the way to keep score. Why everyone doesn't use it is a mystery to me."
MVA is far more revealing than other measures of performance or profitability. On Stem Stewart's latest Performance 1000 ranking of the largest companies in the U.S., General Electric placed No. 1, with an MVA of $196 billion at the end of 1997, while General Motors was No. 1000, with an MVA of -$13.9 billion. Conventional accounting data would never lead one to the conclusion that GE is the champion wealth creator in the U.S. and GM the champion wealth destroyer. On the Fortune 500 ranking for the same period, for example, GM beat GE on both return on equity and return on assets and had a much better one-year change in earnings per share.
The tables presented here are different than any that Stem Stewart has prepared before. Instead of ranking companies, we have ranked their CEOs. The rankings are on the basis of changes in MVA at their companies during the years the CEOs have held the top job. That's a straightforward ranking of CEOs on the basis of how much wealth each has created for shareholders.
The rankings at the very top aren't radically different than the rankings of the companies themselves, Jack Welch, for example, holds the same first place rank as GE, and seven of the top 10 CEOs are at top 10 companies. Some of the changes in position are dramatic, however, as you go down in the rankings. Michael Feuer of Office Max, for instance, ranks No. 548 among CEOs, while the company itself comes in at No. 809.
Some CEOs are at a distinct advantage in the MVA race because they command extremely large companies, and MVA is measured in raw dollars of wealth creation rather than percentages. To adjust for that, Stern Stewart handicapped the field by also calculating changes in MVA relative to the capital a company had when the CEO took office. In other words, it calculated the change in MVA per dollar of beginning capital and ranked the CEOs on the basis of those numbers as well. Stem Stewart refers to this as the change in "standardized" MVA. One way to think of it is as a measure of the efficiency with which each CEO has created wealth for shareholders, since the change in MVA is expressed as the number of dollars of wealth created per dollar of beginning capital.
The ranks change dramatically when you move from absolute changes in MVA to standardized changes. Jack Welch, for example, drops from No. 1 to No. 153. That's because GE was so huge when Welch took over. The most dramatic change of this type, however, happens with Louis Gerstner of IBM. Gerstner's turnaround of [TABULAR DATA OMITTED] IBM places him sixth among CEOs in shareholder wealth created, even though he'd been on the job less than four years at the end of 1997. But when adjustment is made for all the beginning capital that Gerstner had to work with, his rank drops to No. 502.
Bill Gates, in contrast, ranks No. 2 by both measures: first, because Microsoft has created such prodigious wealth, and second, because it started with virtually no capital. No. 1 in the standardized ranking is Bernard J. Ebbers of WorldCom, who, by the end of 1997, had created a stunning $11,821 of MVA for each $1 of capital the company had when he became chief in 1985.
The standardized rankings yield two interesting insights. First, after the longest and biggest bull market in U.S. history, longevity pays. Of the top 100 CEOs on the standardized ranking, only nine had been in office less than five years at the end of 1997. At the other end of the ranking, fully 68 of the bottom 100 listed here (NOTE: 501 TO 600) had tenures of less than five years.
The second is that it helps to be in a high-tech industry or a service business like retailing or restaurants if you want to make it to the top of the wealth-creation ranks. However, that may be due more to the shortcomings of conventional accounting than to disadvantages of capital-intensive firms. Much of the capital underlying pharmaceuticals, software companies, retailers, and the like is of the intangible variety that doesn't show up on balance sheets. Our calculation of capital corrects for the problems with R&D, but it does not fully correct the accounting treatment of formidable investments in brand names, franchise values, and the like.
MVA: The Ultimate Measure of Value
Market Value Added (MVA) is a measure of corporate performance expressed in terms of the amount of shareholder wealth a company has created or destroyed. MVA is the market value of the company (calculated as the market value of equity plus the book value of debt) minus all the "capital" investors have provided in the form of loans, retained earnings, and paid-in capital. In other words, MVA is the difference between "cash in" (what investors have contributed) and "cash out" (what they could get by selling at today's prices). If MVA is positive, it means that the company has increased the value of the capital entrusted to it and thus created shareholder wealth. If MVA is negative, the company has destroyed wealth.
Delta MVA is the change in MVA during the tenure of the current CEO. It measures the increase or decrease in shareholder wealth the company has produced since the CEO took office. In most cases, the beginning measurement point is MVA as of the beginning or end of the year a CEO took office (depending on whether he or she took office in the first or second half of the year). In other cases, it is the end of the year the company went public or the end of 1978, the earliest year for which Stern Stewart has MVA data. Figures on delta MVA were calculated for all CEOs at the 1,000 largest U.S. firms, who took office before the second half of '97 and were in office at the end of '97.
Delta MVA divided by Beginning Capital (or change in "standardized" MVA) is a variation on delta MVA that adjusts for the relative size of different companies. It "scales" the changes in MVA to the amount of capital a company had at the time the CEO took office. As such, it provides a measure of the efficiency with which each chief has used the capital al his or her command, and allows more direct MVA comparisons between companies of vastly different size. If the figure for a CEO is 6.45, it means that the company's MVA has risen $6.45 for each dollar of capital that the company had when the CEO took office. The median for the CEOs on this list is about $3.30 of MVA increase per dollar of beginning capital.
Al Ehrbar is senior vice president of Stern Stewart & Co., a New York-based consulting firm.
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|Title Annotation:||includes related article on market value added|
|Publication:||Chief Executive (U.S.)|
|Date:||Apr 1, 1999|
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