Friday, March 29, 2019
New Metric
Corporations base investor relations and executive compensation on GAAP -- generally accepted accounting principles. But, that may be about to change. ISS, a leading adviser on corporate governance, has announced it will start valuing CEO compensation on Economic Value Added metrics (EVA). This includes the cost of capital taken from the company's after tax earnings. It is a more rigorous -- and some say, more fair -- way to value the work of the CEO. CEOs might wish to reject ISS calculations but for one fact -- institutional shareholders listen to ISS and often vote ISS recommendations. It almost certain, then, that boards will fall in line and directors set CEO compensation according to EVA. The change might be profound for companies whose earnings look good until a capital charge is taken. If CEOs fall in line and calculate EVA, it is inevitable they will impose the methodology on those below them. This will spark a wholesale change in earnings reporting -- GAAP plus EVA. Look for a new way to position companies in years to come.
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