Investors love rankings. They seem to offer an enticing short-cut to understanding an ever-more-complex corporate economy.
Take this, for example: John Chambers, chief executive of Cisco Systems, is worth $1 billion (€1.12 billion), which makes him the 274th richest American, according to Forbes magazine. But by at least one other measure he is the most valuable man in the country.
Valuation Technologies, a Californian-based research company, has produced a ranking of the top 100 companies by management contribution to shareholder value. Cisco tops the list because its management has apparently succeeded in adding $66.9 billion a year over the past five years to the returns an investor might have expected from an equivalent investment.
The Shareholder Value Indicator* is a particularly alluring league table at a time of volatile stock markets and investor uncertainty, as it purports to filter out short-term fluctuations, while still providing a measure that investors can use to compare companies and sectors.
Valuation Technologies believes the indicator could be used as a tool in evaluating management and assessing executive pay. Take Mr Chambers again. According to William M. Mercer, the consultancy, his compensation last year, including salary, bonus, realised and unrealised option gains, amounted to $604 million. That looks steep, but it is less than 1 per cent of the management's estimated annual contribution to shareholder value.
The basis for the indicator is stock price - or, more precisely, stock market capitalisation. What Valuation Technologies tries to do is strip out the proportion of any increase (or decrease) in market capitalisation that is attributable to management.
By taking a five-year time period, the company reckons it has smoothed out market fads and short-term volatility. If the same calculation had been applied for the 12 months up to the cut-off date of July 31st, 2000, Microsoft, the acquisitive mini-conglomerate Tyco and IBM, all in the top 10, would have plummeted more than 8,000 places in the ranking, because the indicator holds management responsible for part of the decline in market capitalisation.
That raises the question of how durable management's contribution is likely to be - and what happens when the top jobs change hands.
For instance, Mr Jeffrey Immelt, named chairman-elect of General Electric a week ago, will have to deliver at least $36.5 billion in management added value annually to match the performance of Jack Welch, his legendary predecessor, over the past five years.
Published in Shareholder Value magazine, www.kennedyinfo.com.
