Click here to see a slideshow of the Top 10 Most Valuable CEOs
Click here to see a full list of companies and their respective rankings
Click here to read Editor-in-Chief JP Donlon’s editor’s note about this year’s top CEOs
Click here to read about the methodology behind the list
Having come out of three tough years since the economic meltdown of 2008, business leaders may be forgiven for thinking that maybe Nietzsche was right—that which doesn’t kill you makes you stronger. Before 2008, growth was comparatively easier to come by, but the problem with growth is that it often disguises mistakes and bad managerial hygiene. To grow profitably in real economic terms, without unsustainable leverage and without buggering up the balance sheet, is not simple. Now in its fourth year, the Wealth Creation Index (WCI), created in partnership with Applied Finance Group and Drew Morris of GreatNumbers!, separates the steady wealth creators from those who occasionally get lucky but do not have the discipline to maintain a steady return on real capital. With the low-hanging fruit behind us, those companies that remain at the top usually take a disciplined approach to managing capital returns. Theyhave a solid plan for remaining prosperous, the initiatives in place to pull it off, and the balance-sheet discipline not to overpay for acquisitions, for example.
The WCI seeks to measure companies that generate real economic value—as opposed to mere GAAP accounting value. The index relies heavily on the idea of Economic Margin (EM), which measures the degree to which the company is making money in excess of its risk-adjusted capital cost. It’s expressed as a percentage of invested capital and calculated as operating cash flow minus a capital charge all divided by invested capital. Companies with positive EM (greater than zero percent) are creating wealth; those with negative EM are destroying it.
While no single metric is the Holy Grail in running one’s business, EM comes closer than most, as it looks at a business the way any true owner would. How effectively is every dollar invested in this business working? It’s a discipline that applies to any firm, public or private, from a local chain of dry cleaners to General Motors. Many private equity firms use some variation of EM in doing their own evaluations; it is useful to know how people whose careers depend upon it size up one’s performance. The rankings look at public companies (minus REITs) in the S&P 500, where the CEO has been running the enterprise for at least three years, in order to fairly judge a leader’s impact on the company.
St. Louis-based Express Scripts, a large pharmacy benefit manager (PBM), landed the top position in 2011, following previous years where it was ranked #57 and #47. The company rose through the ranks largely due to to its success delivering growth through acquisitions, notably the PBM business of WellPoint in 2009, while maintaining and improving profitable operations. Express Scripts has proved skillful in integrating acquisitions, something few companies are capable of getting right.
If the proposed Express Scripts merger with Medco Health goes through, it will be a game-changing deal, doubling ES market share to about 35 to 40 percent in this industry—one where scale is everything. Needless to say, there is much potential synergy on costs, once the two are combined and retail pharmacies are potentially squeezed further. [This explains why the National Community of Pharmacists Association (NCPA) has testified before a Congressional subcommittee against the merger.]
CEO George Paz points to two factors that contribute to his company’s performance: its independence from Big Pharma and its diligence in using research to drive out waste and to make medicines safe and affordable in order to optimize health outcomes. “You can look across the healthcare industry and be hard-pressed to find any sector that makes money when it saves its clients money, yet that is exactly what we do,” he says. “We offer clients innovative ways to lower prescription drug costs and, more importantly, improve health outcomes of members.”
Other firms that consistently rank among the top performers in recent years are Aflac, Apple, Autozone, Gilead Sciences andC.H. Robinson Worldwide. Mike Burdi, Applied Finance Group senior analyst, points to several common elements that these enterprises share. “Do your customers care whether you stay in business?” he asks. “It’s one thing to say that one is customer focused; most claim to be as a matter of course. But would your customers really miss not having access to what you offer?”
Apple (#5) is a poster child for using these elements, as is Amazon.com (#87). Meanwhile, Netflix (#25) will soon find out where it stands on that front. Apple’s challenge will be to maintain its allure after the loss of Steve Jobs. “In most research on what high-capital-return companies have in common, the common thread is the ability to consistently fulfill an unmet customer need, often when the customer didn’t really realize the need was unmet,” notes Burdi. “This is equally true whether one is big cap or small cap.”