Chief Executive’s 2014 Wealth Creators Index: MasterCard CEO Ajay Banga Tops the List

View the Entire 2014 Wealth Creators Index

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.

Current common methods of measuring corporate performance are based on earnings, earnings growth and return on equity (ROE). While these have their place, it is possible for companies to take actions that increase earnings that do not create value, often in the hope of gaining stock analyst upgrades. Looking at performance from an EVA/MVA perspective corrects accounting distortions that are legitimate but do not offer a true picture of economic value. Using these metrics more accurately reflects which companies are generating wealth after factoring in their true cost of capital.

Topping the ranking this year is MasterCard, a Purchase, New York-based technology company in the global payments industry. It helps to have a business model that has proved wickedly successful at throwing off cash. The company returns to the top of the Wealth Creation Index (WCI). Then-CEO Robert Selander won in 2009. MasterCard operates the world’s fastest payments processing network connecting consumers, financial institutions, merchants, governments and businesses in more than 210 countries.

Since he assumed the role of CEO in 2010, Ajay Banga has accelerated the evolution of the $8.3 billion company, setting a vision and defining a culture that saw the company quickly shift from its historical focus on issuing banks. Ajay established a three-pronged strategy to diversify the business by:

  • Growing the core business (credit, debit, prepaid and commercial);
  • Diversifying across geographies and customers (expanding relationships with non-traditional segments); and
  • Building new businesses (addressing the increasing convergence of the physical and digital worlds).

The result has been a 47.4 percent total annual average return to shareholders over the last five years. In addition, the company lured international customers with a mobile payment network, MasterPass, that lets people purchase with a simple click. At the mall, for example, MasterPass lets users tap a device at a cash register or scan a digital barcode. When online, customers can load any credit card—even if it’s not a MasterCard—onto a digital wallet. The company is developing a platform giving people the ability to pay for items while they wait in line or browse in stores.

Observing that 85 percent of the world’s transactions are still in currency, Banga has declared a “war on cash” to nudge as many consumers as possible toward electronic payments, preferably processed by MasterCard. Although competition to handle payments is intense in the U.S., the wider battlegrounds are in countries like India and Brazil, which have vast numbers of people without bank accounts, and a growing middle class.

IT and financial services, food & beverage, food retailing and healthcare service providers are all well represented in this year’s rankings. In addition to MasterCard, firms such as Fastenal, Monsanto, Discovery Communications, Precision Castparts and for-profit educator DeVry have all been consistent performers ranking among the top 100 wealth creators since the WCI’s inception in 2008.

Not all of these companies use EVA specifically but they clearly manage assets in highly efficient ways. After all, the essence of EVA is sales less operating costs less the full costs of financing business assets—as if the assets had been rented. It consolidates income efficiency and asset management into one net profit score. To sum up, regardless of the method used, companies that consistently make our list practice three managerial precepts:

  1. Operate efficiently by cutting wasteful costs;
  2. Grow profitably by investing and building the business while covering the cost of invested capital
  3. Purge ruthlessly by abandoning uneconomic activities that can’t cover the cost of capital.

 




J.P. Donlon :J.P. Donlon is Editor Emeritus of Chief Executive magazine.