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C.E.O. compensation: Shareholders should look at company’s multi-year record

Chief executive officers who work to propel their company’s stock price can generate “fleeting benefits and disastrous consequences. A better way to measure whether a C.E.O. has created value at a company is to look at its return on capital over a period of years.”

That’s a takeaway from an insightful new column by New York Times columnist Gretchen Morgenson.

Harvesting advice from several investment counselors, Ms. Morgenson cites this keystone for company valuation: Examine a company’s return on investment over the last five years and then compare it with companies in the same industry.

That advice refreshes and reinforces the investing philosophy of patient, long-term company valuation. It’s the antithesis of day-trading and short-term company management aimed at rocketing share price while running a company aground. The recent Valeant International drug company debacle is a poster child for such short term management dalliance.

Companies engaged in the management and reporting for the long term have made such commitments apparent in their shareholder relations reporting. Some have even eschewed quarterly reports, viewed as stimulants to over-speculation. And the growing management adoption of sustainability is accelerating the adoption of long-term company valuation. “Integrated reporting” now presents shareholders — and all stakeholders — with both traditional (mainly explicitly financial) information as well as updates on the challenges and opportunities inherent in ESG (environmental, governance and social) issues. A prime example: the risks and benefits of evolving policy and performance related to climate change.

Of course, most C.E.O.s work very hard. They should be compensated fairly. Corporate boards and, ultimately shareholders, have the challenging — but not impossible — task of determining what “fairly” means.