ISS Buys EVA Dimensions to Bolster Voting Advice for InvestorsBy
EVA founded in ’06 by ex-management consultant Bennett Stewart
Firm builds its services around ‘economic value added’ metric
Institutional Shareholder Services Inc. acquired research firm EVA Dimensions LLC to strengthen the advice it gives investors before they vote at public-company meetings on matters including executive compensation and board appointments.
EVA’s services for measuring corporate performance will help “investment professionals to determine the intrinsic value or risk of portfolio companies,” ISS Chief Executive Officer Gary Retelny said Monday in an emailed statement announcing the deal. Terms weren’t disclosed.
The research firm builds its services around a metric called economic value added, also known as economic profit, which measures a company’s operating profit minus the cost of debt and equity. If the figure is negative, the firm’s rate of return on sales of goods and services is smaller than the cost of financing its operations.
Gauging how a company performs is central to vote recommendations ISS issues ahead of about 40,000 shareholder meetings each year, making it the world’s biggest proxy adviser. Its clients include some of the largest institutional investors. While the recommendations aren’t binding, research suggests the firm’s opinions can sway outcomes by as much as 20 percent.
For years, stock return has been a cornerstone of ISS’s pay-for-performance analysis, which gauges whether corporate bosses are worth their paychecks. As a result, boards seeking to please the firm and avoid unfavorable recommendations began putting more emphasis on that metric in compensation plans, incentivizing executives to spend money on buybacks rather than making long-term investments, critics have said.
Last year, ISS added a number of measurements to its analysis, including return on invested capital and revenue growth, in response to feedback from clients. The Rockville, Maryland-based proxy adviser will consider implementing EVA’s models into its evaluation of policies for 2019.
Proponents of using the economic-value-added metric to help determine whether executives deserve their pay argue that it rewards bosses for results within their control, and encourages long-term thinking. EVA was formed in 2006 by Bennett Stewart, a former management consultant who helped develop the measurement at Stern Stewart & Co., which he co-founded more than two decades earlier.
The Bloomberg Pay Index, a ranking of the 200 top-paid executives of firms whose shares trade on U.S. exchanges, uses companies’ average economic profit over three years to evaluate the performance of corporate leaders.