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.

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