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.

This article originally appeared in Chief Executive magazine. Click here for the article and complete ranking charts.

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 and C.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 customerfocused; 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.” – J.P. Donlon

Top 10 Wealth Creators

1. Express Scripts, CEO George Paz
2. Exelon, CEO John W. Rowe
3. Priceline.com, CEO Jeffery H. Boyd
4. Varian Medical Systems, CEO Timothy E. Guertin
5. Apple, [former] CEO Steven P. Jobs
6. Philip Morris, CEO Louis C. Camilleri
7. Halliburton, CEO David J. Lesar
8. Gilead Sciences, CEO John C. Martin, Ph.D.
9. Linear Technology, CEO Lothar Maier
10. MetroPCS, CEO Roger D. Linquist

Top 10 Wealth Destroyers

1. Monster, CEO Salvatore Iannuzzi
2. Alcoa, CEO Klaus Kleinfeld
3. Dean Foods, CEO Gregg L. Engles
4. PerkinElmer, CEO Robert F. Friel
5. Micron Technology, CEO Steven R. Appleton
6. Nasdaq OMX Group, CEO Robert Greifeld
7. Tenet Healthcare, CEO Trevor Fetter
8. Stanley Black & Decker, CEO John F. Lundgren
9. Nisource, CEO Robert C. Skaggs, Jr.
10. Electronic Arts, CEO John S. Riccitiello

Ranking CEO Wealth Creation by Drew Morris and Michael Burdi
Our ranking is based on the performance of companies in the S&P 500 Index (and their CEOs) for the three years ending on June 30, 2011. It considers reported financial results during that period and estimates for the next 12 months. Only companies whose CEOs were in their roles for the entire July 2008 through June 2011 period were ranked. Not ranked are the 13 REITs in the 2011 S&P 500.

The four components of the ranking, explained below, were developed and calculated by the Applied Finance Group (AFG), an independent equity research advisory firm, using their proprietary metrics and data. An again-proprietary weighted combination of each company’s component rankings, taking into account the industry the company is in, is used to produce an overall score: 100 is awarded to the best wealth creator; 1 to the worst. (The list itself shows these overall scores as a sequential ranking.) The component rankings are shown as letter grades with companies in the top 20 percent of each component metric receiving an A grade; the bottom 20 percent receiving an F.

Market (or Enterprise) Value/Invested Capital (MV/IC)
This measure shows the degree to which investors consider the company’s assets valuable, relative to their cost. Market value is what a buyer would have to pay to buy the company outright, that is, to purchase all of the stock and pay off all of the loans, leases and other obligations. Note that market value depends on the stock price. Invested capital is the inflationadjusted total of all of the investments in the business. It does not depend on the stock price. So by its nature, MV/IC reflects the market’s take on the value of the investments made in the business.

The Average of the Past Three Years’ Economic Margins
Economic Margin (EM) measures the degree to which the company is making money in excess of its risk-adjusted capital cost—riskier businesses get relatively higher capital costs. EM is expressed as a percentage of invested capital. It’s calculated as (Operating Cash Flow – the Capital Charge)/Invested Capital. Companies with positive EM (greater than 0 percent) are creating wealth; those with negative EM are destroying it.

EM Change
This is a 12-month forecasted EM, based on the ratio of the most recent EM to the 3-year average.

Management Quality
This AFG-proprietary measure rewards a company with positive EM for growing its asset base, and penalizes one with negative EM for doing the same thing. In other words, if a company is making money and it adds assets in such a way that it can make even more, that’s good. So is selling off a money-losing division. That said, it’s also valid that adding scale can dramatically increase profitability in a business with high fixed costs.

A Validity Check on the Ranking Method
The top 50 companies in the ranking delivered an average Total Shareholder Return (TSR) of 68.5 percent between January 2008 and June 2011 (the period covered in the reported financials). The bottom 50 companies’ TSR averaged -9.3 percent, while the S&P 500’s average was 14.9 percent (without its 14 REITs). The top 50’s median TSR was 40.7 percent; the bottom 50’s was -11.7 percent.

Total Shareholder Return

As the table above shows, the top 50 companies in the wealth creation ranking far outperformed the bottom 50 companies and the S&P 500 between July 2008 and June 2011. Note: TSR = (Change in Share Price over Period + Dividends)/Start-of-Period Share Price.

For more on Economic Margin and how companies scored, see http://www.economicmargin.com/moreinfo.htm.

“CEO Apologizes For Spying; As Governmental Queries Escalate, Company Pulls Out Of Key Transaction”

“Runaway Investigation Brings Down Senior Executives; Criminal Charges Loom”

“Company Snooping Sparks Probe; Interception of Calls Draws Government Inquiry”

“Company Spy Saga Widens; Company Says Surveillance Wasn’t Carried Out By Its Own Employees”

“Politicians Want Blood After Spying Scandal; Company’s Number Two Executive Is Ousted”

Ernest Brod

Investigative stumbles involving major companies date back to 1968 with General Motors’ highly intrusive investigation of Ralph Nader, who had written a book critical of the Corvair car. When GM’s actions became public, the outcry spawned executive firings and Congressional hearings. More than 30 years later, Hewlett-Packard’s investigation of a boardroom leak gained by tricking a telephone company into revealing personal customer information, brought the term “pretexting” into the mainstream and led to criminal charges, Congressional investigations and the passage of new legislation. And, yet, lessons remained unlearned.

Less than two years later, Walmart found itself in the headlines, in front of Congress and facing criminal charges after its investigators were caught intercepting telephone messages of newspaper reporters, employees, stockholders and critics. And in a virtual replay, in 2009 Deutsche Bank’s outside investigators were discovered spying on the company’s board members in connection with a leak.  The sorry parade of repeat performances begs the obvious question: Why do investigative scandals keep happening?

Corporations are often not as sensitive to the risks involved and are sometimes careless in selecting an investigator. Under pressure to achieve results, they may fail to set the scope or ask the tough questions of the investigators. And, in their eagerness to satisfy clients’ needs, some investigators may cross the thin line that exists between creative investigative procedures and dangerous activities.

Notwithstanding the risks, companies are still required to conduct investigations in a range of circumstances, including whistleblower allegations, regulatory inquiries, trade secret theft, counterfeiting of products, employee controversies and disability claims.  In today’s climate, senior management, boards, and inside and outside counsel must weigh numerous considerations.

1. Is an Investigation Necessary?

Investigations should be launched only after carefully assessing risks and rewards. Is an investigation vital to the company’s interests? (Has there been a theft of trade secrets or a serious whistleblower allegation?) Or, are company officials overreacting to a perceived threat?

2. Internal or External Investigators?

The next step is to decide whether to conduct the investigation in-house or engage an outside investigator. Internal investigators or security staff may be motivated to satisfy their “boss,” and be tempted to push the envelope. For more than routine matters, companies would be well served to seek an outside specialist with the objectivity, experience and resources.

3.  Who’s In Charge, and What Are the Rules of the Road?

It is imperative that the company establish clear and proper governance: Who will be responsible for supervising the investigation and make key decisions? Will the general counsel be involved? The CEO? The board? The need for early governance cannot be overstated so that the company can protect itself against potentially embarrassing problems before the investigation even begins. This is especially important in light of the possible damage to a company’s reputation if it is publicly identified with investigators’ alleged wrongdoing.  Companies have been slow to set up controls to govern their investigative activities. Is there a corporate Director of Investigations?  Where should the position report? Are there written procedures for the supervision and conduct of investigations, including acceptable actions? The well-prepared company will have an outside consultant perform a “diagnostic” of the firm’s approach to investigations.

4. Acceptable Tactics

The company and investigations firm should agree on acceptable investigative tactics.  In determining the specific techniques to be used, clients must always consider their reaction to media disclosure. In certain situations, some actions are easily defensible – as when company trade secrets are stolen or products are counterfeited. They may not be as easily defended when a CEO is upset by a rumor about him on the Internet.

Until the “The Telephone Records and Privacy Protection Act of 2006” came into effect, federal and state laws were murky about whether “pretexting” a phone company was illegal. The most applicable federal statutes – the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act – referred specifically to obtaining financial information fraudulently. But is all pretexting illegal?

For example, an investigator checking the counterfeiting of a client’s watches may pose as a customer to purchase suspect watches from a street vendor. In trying to obtain intelligence about the alleged theft of a client’s trade secrets by a competitor, an investigator may contact the competitor company. The investigator may claim he or she “is working with a consulting firm,” or is “doing a research project,” or has been “asked to get this information by my boss.” Such mild pretenses are not usually objectionable. However, the investigator would cross the line if he identified himself as someone else, or claimed/implied a connection with a law enforcement organization.

What about the propriety of other common investigative activities?

Investigative Research– Sophisticated research and analyses of “open sources” for public record information is the most common investigative approach. It may lack drama but it is often the most efficient and cost-effective way to obtain information. The gathering of such data raises no legitimate legal or ethical issues.

Surveillance — Surveillance is expensive, complicated and risky. Unless the surveillance is intrusive enough to constitute harassment, there are usually no legal issues. But, if the surveillance becomes known, it is likely to be described in the media as “snooping” or “spying,” and could create a public relations nightmare.

Recording Conversations — Using equipment to listen to, or record, conversations without either party’s consent is usually illegal. There is a common misconception that legality depends on the right of the person placing the equipment to have access to the premises. A few years ago, a prominent politician found trying to place a “bug” on the family boat – to catch her husband in compromising circumstances – learned that regardless of her right to be on the boat, there must be consent by at least one party to a recorded conversation.

Searching Trash — Known as “dumpster diving,” the collection and search of refuse by investigators may be legal, if the trash has been disposed of in a manner that indicates there is no “expectation of privacy.” Even when conducted legally, it could result in negative publicity for the client and investigator if the practice becomes known.

5. Selecting an Outside Investigator

The need to inaugurate an investigation is almost always generated by a crisis, yet companies sometimes lose sight of the distinction between “gumshoe” and “white shoe” investigation firms. Establish mechanisms to monitor investigators’ activities and guard against impropriety (or worse) through a risk management group and/or internal general counsel. Get recommendations from people you trust and ask for references. Determine how the firm monitors its own activities, and make sure that the people you meet will work on your investigation.  Ask about their use of outside subcontractors, and how they supervise them.  Make sure their retention letter warrants that only legal methods will be employed.

In the final analysis, whether working with inside or outside investigators, companies must look for people with the reputation, experience, and culture that conforms to the physician’s Hippocratic Oath – “First do no harm.”

Ernest Brod is a managing director with Alvarez & Marsal Dispute Analysis & Forensic Services and leads the firm’s Business Intelligence practice.

Associated Press

News Corp. has appointed U.K. attorney Anthony Grabiner to head an internal investigation. Grabiner is non-executive chairman of the privately owned clothing retailer Arcadia Group. Perkins told reporters he would “personally make damn sure” that the probe would be independent. News Corp. said it also has hired Sard Verbinnen & Co. to help with investor relations and the Glover Park Group—the powerful D.C.-based lobbying group managed by Clinton White House notables Dee Dee Myers, Joe Lockhart and Susan Brophy—to assist with policy. The board has retained the law firm Debevoise & Plimpton to advise it on the crisis.

Meanwhile, shareholders involved in a class-action suit against News Corp. have expanded their allegations in light of the scandal. The plaintiffs accuse the publishing billionaire and the board of having knowledge of the unethical information-gathering techniques. The original suit was filed in March in Delaware’s Court of Chancery following News Corp.’s purchase of the TV film and production company Shine Group—which is owned by daughter Elisabeth Murdoch—a move shareholders assert had no strategic value and was simply a nepotistic deal. News Corp. also dropped its bid for control of British Sky Broadcasting Group under pressure from lawmakers in relation to the hacking scandal. In addition to the shareholder class action, News Corp. executives face investigation by law enforcement and market regulators in the U.K. and the U.S.; experts suggest a raft of additional legal action could be likely.

For Jobs, The Day Arrives; Cook Steps Up As CEO
While on his third medical leave, Apple cofounder Steve Jobs resigned from the CEO position Aug. 24, and will remain chairman. As widely expected, current COO Tim Cook took the reins as chief executive. In a letter of resignation, Jobs recommended the company follow its previously established succession plan for Cook’s promotion. “I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know. Unfortunately, that day has come,” he wrote to the board. The Wall Street Journal reported that some Apple directors had discussed succession plans informally with executive recruiters in the weeks leading up to Jobs’ resignation. “For individuals to hold these conversations outside of the official scope of the board is rare at a company where board members have been handpicked by Jobs,” one source told the newspaper.

Two Heads Better Than One
Richard Branson’s Virgin Group has restructured top management as it plans to move from a defensive position designed for the recession to a period of expansion. Stephen Murphy, chief executive since 2004 and a 17-year Virgin veteran, will step into an advisory position and be replaced by two co-chief executives— David Baxby, head of both Virgin Asia-Pacific and the aviation business, and Josh Bayliss, general counsel. The move is part of a long-term plan devised by Murphy and Virgin Group Chairman Peter Norris. Though the cochief arrangement has drawn criticism at other companies, Virgin says it is appropriate for a group that is more a manager of assets than an operating firm.

Google Probed, Again
Though Google has faced M&A antitrust probes in the past, federal regulators have expanded their inquiries to examine the company’s web search success. The Federal Trade Commission is expected to subpoena the Internet giant to glean more information about whether Google search results are unfairly biased to boost its own services. The inquiry is expected to be as precedential as the 1990s Justice Department lawsuit against Microsoft. The Associated Press reported that Google’s quarterly lobbying expenses surpassed $2 million for the first time during the second quarter as it pleaded its case to lawmakers and regulators— a 54 percent increase over the same period a year ago.

FDIC Expands Clawbacks
The Federal Deposit Insurance Corp. has established a new executive compensation clawback rule for failed banks, allowing the agency to recover up to two years of pay if the executive is deemed to have been “substantially responsible” for the failure. The new “substantially responsible” clause means the rules are more aggressive than the business judgment rule, placing the burden of proof on executives to show that they exercised “the degree of skill and care required by the position.”

CFO/CEO Pay Gap Widens
While CFO pay in general has been rising to pre-financial crisis levels, one study shows the pay gap between CFOs and CEOs to be widening, at least among middle market companies. Accounting firm BDO found that the gulf was largely due to changes in CEO pay-for-performance compensation structures. Middle market CFOs typically earn between 55 percent and 60 percent of their chief executive’s pay. Last year, though, they earned only 40 percent on average. BDO studied 600 public companies with annual revenues ranging from $25 million to $1 billion for its results.

An analysis of 55 proxy statements for non-financial services companies with median revenues of $10 billion by Compensation Advisory Partners found that movement in pay among CFOs and CEOs was, on average, directionally similar. However, CAP’s analysis revealed that over the last three years CFO actual total direct compensation was generally 30-35 percent of CEO actual total direct compensation.

Ousted Director Wants Tighter London Listing Rules
London’s ERNC mining giant boardroom coup victim Sir Richard Sykes is calling for the Financial Services Authority to strengthen its governance listing standards following his ouster. Sykes was allegedly removed from the board, along with fellow independent director Ken Olisa, after the founding shareholders felt the two were excessively interfering. Sykes has urged regulators to institute a standard whereby a minimum of 25 percent of a company’s shares must be listed in order to avoid executive shareowners using their votes to control the board.

Beware the ‘Distort and Short’
Convicted con man Barry Minkow was sent back to prison for five years for involvement in a scam that cost homebuilder Lennar Corp. some $580 million in lost stock value. Minkow, who admitted to being part of a scheme, used his high-profile status and access to national media in 2009 to issue press releases, send emails and post YouTube videos claiming Lennar was beset by faulty accounting, misappropriation of corporate funds and other wrongdoing. Minkow’s scheme—the opposite of a “pump and dump”—was to “distort and short,” betting that Lennar’s stock would go down while at the same time releasing negative reports on the company.

SEC Warns on Reverse Mergers
Having suspended trading in more than a dozen reverse merger companies, the Securities and Exchange Commission cautioned investors about purchasing shares in companies that enter U.S. markets through so-called “reverse mergers” or backdoor listings. The bulletin warns of the potential risks of investing in such companies, and identifies some of the recent enforcement actions that the SEC has brought against a number of listed reverse-merger companies, including many Chinabased companies that became domestic issuers through the reverse-merger process. A reverse merger is often perceived to be a quicker and cheaper method of going public than a traditional IPO.

A Haven for Good Governance?
Established in the aftermath of the global financial crisis, Singapore’s Corporate Governance Council is recommending changes to regulate director independence and board oversight. The Council for the city-state has called for more directors who are not employees, family members of executives, or who have served on the board for more than nine years. “Good corporate governance plays an important role in ensuring the effective functioning of Singapore’s capital markets,” a council member was quoted as saying.

Top Priorities of Directors

1. Strategic planning 72.1%
2. Corporate performance and valuation 40.6%
3. Risk and crisis oversight 27.1%
4. Executive talent management 25.8%
5. CEO succession 25%

Source: NACD 2011 Public Company Governance Survey