More than ever, CEOs have been under scrutiny. The public looks to business leaders to create new jobs, but to do that they have to generate real economic value—as opposed to mere accounting value as measured by GAAP metrics. Creating value is, after all, what CEOs are paid to do. But how should it be measured? For our seventh annual index, Chief Executive partnered with EVA Dimensions’ CEO Bennett Stewart and Great Numbers!’s CEO Drew Morris. We ranked the top 100 public companies of the S&P 500 where the CEO has been in place for at least three years (see p. 39). Similarly, we also ranked the top 40 mid-market companies (see p. 43) from the Russell 3000 in two tiers: upper mid-market companies with revenues between $500 million and $1 billion, and a lower mid-market tier of companies with revenues between $100 million and $500 million.
While there is no single measure that is perfect, we relied on two key underlying metrics:
MVA, or market value added, is the spread between a firm’s overall market value and the total capital that’s been invested in its net business assets. It is the value added to, or deducted from, the owner’s investment in the business. It equals the owners’ wealth, measures the firm’s franchise value, and represents its aggregate NPV (net present value). Increasing MVA is the key to creating wealth and driving total shareholder return.
EVA, or economic value added, measures a firm’s economic profit—it is profit after subtracting a full, weighted average cost of capital, and after correcting accounting distortions. EVA increases when costs are cut, assets are managed judiciously, and when management invests new capital, including R&D and ad spending, to profitably grow the business over the full cost of the capital.