Creating Real Wealth: CEOs at the top of CE's fourth MVA ranking inspire employees, please customers, and manage to make money for shareholders even in tough times - Performance Measurement - Market Value Added

Chief Executive, The, Dec, 2001 by Gregory J. Millman

It's a rare business story that makes you reach for the Bible, but Luke 1:52, "He has put down the mighty," pretty well sums up this year's ranking of CEOs by the Market Value Added (MVA) system. The method reflects the amount by which shareholder wealth has grown or, when MVA is negative, shrunk. Four times during the past three years, Chief Executive magazine has teamed with New York City consulting firm Stem Stewart & Co. to rank CEOs of the country's largest companies based on the changes in MVA.

Why rank CEOs by MVA? "The market value added is the bottom line for any company. All of the other period-by-period financial measures are of interest only to the extent that they tell us something about what the market value added will be in the future or has been in the past," says Michael Jensen, professor emeritus of the Harvard Business School and head of the organizational strategy practice at the Monitor Group, Cambridge, MA.

Of course, the job of wealth creation is only effective when the wealth lasts. During the recent tech stock bubble, many CEOs seemed to create investor wealth. But that wealth has proved fleeting. Consider Noam Lotan, the CEO of MRV Communications, a maker of fiber-optic components and other Internet infrastructure equipment. Last year, when the new economy was hot, Lotan ranked No. 23 on the MVA list. He had created $600 of new wealth for each dollar of capital in the company when he took the helm. What a difference a year makes. Since the last ranking, the CEO has lost about $230 for each dollar of beginning capital, and Lotan ranks No. 914 on the MVA list.

"Very often, CEOs get sucked into a gold rush that the markets, analysts, and others bring about, and trying to meet those expectations, they end up taking actions that destroy value. There are lots of those companies around," says Jensen.

A year ago, CMGI was a well-known incubator of e-commerce startups, its CEO David S. Wetherell ranked No. 5 on the MVA table, right behind Yahoo's Tim Koogle. This year finds Wetherell in a race to the bottom. CMGI shareholders are $6 billion poorer this year than last, partly as a result of expensive acquisitions.

A similar problem with acquisitions sent Bernard Ebbers of WorldCom down the value stairs. He placed first among value-creating CEOs for the past two years. This year, he's last. A victim of the bear market? There's more to it than that. Telecommunications stocks have taken a tumble, but some telecom CEOs still managed to create value for their shareholders. Most notably, Robert Price of Price Communications Corp., who was ranked No. 32 last year, in 2001 climbed to No. 25, even as Ebbers fell.

As the contrast between Ebbers and Price suggests, getting to the top or bottom of the MVA rankings isn't just a matter of stock market luck. Despite the hammering tech stocks have taken lately, some CEOs in technology industries have continued to make money for their shareholders. Dell Computer's Michael Dell, Sun Microsystems' Scott McNealy, Qualcomm's Irwin Jacobs, and Oracle's Lawrence J. Ellison all once again landed in the top 25 on the MVA list. AOL Time Warner's Steve Case moves from second place last year to first in 2001.

CEOs at the pinnacle of the MVA list "keep a close eye on and are guided in every decision they make by what creates value and what does not," Harvard's Jensen says. "No matter what the market is favoring in the short run, they make decisions to create value in the long run."

Even the most troubled sectors have CEOs who excel at creating value. Roughly half the CEOs in each industry fell above the ranking's median, and half below, points out Al Ehrbar, partner at Stern Stewart. "Industry is not destiny," he says.

Even in some demonstrably poor-performing industries, such as energy, materials, and capital goods, where most companies are in the bottom half of the rankings, a few CEOs manage to stand out. In materials, for example, more than 80 percent of the companies rank below the median for value creation. But Peter McCausland, CEO of Airgas, a distributor of medical, industrial, and specialty gases, is a rose among the thorns. McCausland climbed 183 rungs to No. 149. Since moving into the corner office in 1987, McCausland has managed to multiply shareholder wealth tenfold. He now ranks respectably within the top 15 percent of all CEOs.

The diversified financials sector also has its share of winners and losers. Capital One's Richard Fairbank moves to No. 136 this year from No. 180 last year, while Providian's Shailesh Mehta falls to a dismal No. 833 from No. 166 last year. This is striking given that Mehta, who became CEO of Providian in 1988, has been in the CEO chair seven years longer than Fairbank. Since MVA measures the value created during a CEO'S tenure, those CEOs who have been on the job longer have a better shot at the top of the list, simply because they've had more time to create value. Moreover, Providian and Capital One have business strategies so similar that Mehta said earlier this year, "If anyone comes close to our skill set it would be Capital One." Yet Capital One s shareholders are richer than they were a year ago, while Providian's are poorer. In late October, Mehta promised shareholders he would leave the CEO post as soon as a replacement was found.