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Now in it’s 8th year, the Wealth Creation Index (WCI) seeks to identify the top public companies (S&P 500 and middle-market) whose CEOs created true economic value as opposed to GAAP accounting value. The methodology is based on the idea of Economic Value Added (EVA) and Market Value Added (MVA), which measure the degree to which companies make money in excess of their risk-adjusted cost of capital. Companies with positive EVA are creating wealth. Those with negative EVA are destroying wealth.
While no single metric is the Holy Grail of performance and wealth creation, EVA and MVA come close. How effectively is each dollar invested in a business? It’s a discipline that can be used by any public or private business, from a chain of pizza parlors to Apple Inc. Many private equity firms use variations of such measures in evaluating their own portfolio companies.
For the data and analysis, we partnered with EVA Dimensions LLP CEO Bennett Stewart, a pioneer in economic value research and with Drew Morris, CEO of Great Numbers!, a New Jersey results consultancy.
The idea is to look at companies in the S&P 500 (minus REITs) whose CEOs have been at their jobs for at least three years, a practice that screens out leaders taking credit for a predecessor’s actions. The top 100 ranked companies and their leaders feature the best performers in the same way world-class swimmers are separated by mere hundredths of seconds in Olympic competition. All of them are in a league of their own.
Yet someone’s got to collect the gold, silver and bronze and this year it falls to Facebook, MasterCard and O’Reilly Automotive respectively—companies that couldn’t be more different from one another apart from being perhaps lighter on fixed assets than most. Facebook’s rise clearly reflects the network effect. The company, which had its IPO in May of 2012, was first-to-scale in social media and benefited mightily from technological and commercial advances in mobile phones and mobile phone cameras. Facebook is the epitome of being in the right place at the right time. MasterCard returns this year in second place from its No. 1 rank in 2014. It also represents economies of scale and a network effect. It helps to have a business model that has proven astonishingly successful in throwing off cash.
The Purchase, New York payments firm depends on a strong technology network that addresses the increasing convergence of physical and digital worlds. Given that $8 out of $10 of world consumer transactions are still done in cash, MasterCard has a lot of headroom to expand its market.
Third-ranked O’Reilly Automotive also benefits from economies of scale and an extensive distribution network. Launched in 1957 as a retail auto parts distributor in Springfield, Missouri, it
has since expanded into 43 states with 4,433 employees. It boasts a robust supply chain and overshadows competitors, such as Pep Boys, in operational efficiencies.
Other companies such as Roper Industries, Pall, Chipotle, L Brands, Schein Pharmaceutical, Monsanto, Walt Disney and Harman are notable for having greatly improved their ranking from previous years, showing that such firms are no flash in the pan. Apple, ranked 43, is to some degree the victim of large numbers. At $224 billion it is 10 times as large as the third-largest
player in its field and must struggle to keep that meteoric EVA momentum growth. Tim Cook has said he wants to diversify Apple’s dependence on mobile phones, which represent two-thirds
of its revenue.
If there is a theme to this year’s rankings it may be the power of two. For every Facebook there is a Google; for every MasterCard there is a Visa; for every O’Reilly Automotive, there is an AutoZone. Facing off with a tough competitor, the way Coke and Pepsi once did and CVS and Walgreens still do, reinforces competitive spirits and spurs wealth creation for shareholders.
Sidebar: Ranking CEO Wealth Creation
Sidebar: A Look at Three of the Best Wealth Creators
This article appears in the November/December 2015 issue of Chief Executive magazine, page 28. To subscribe to Chief Executive magazine, click here.