The Advisors' Blog

– Lynn Jokela

We’ve blogged before about ISS’ new EVA metrics that are being used in this year’s pay-for-performance analysis.  Hopefully comp committees are looking at EVA metrics to understand how or if use of the metrics will affect a company’s P4P analysis.  And, this Jones Day blog points out that depending on a company’s strategy, EVA may end up hurting its P4P analysis and may reward short-termism.

Perhaps more importantly, are EVA-based metrics really a better measure of a company’s performance? One problematic aspect is that EVA-based measurements can reward CEOs of turnaround companies even if the expected upswings in the companies’ performance have not yet been achieved. The use of EVA can also penalize companies that are investing heavily in the future but not yet realizing the fruits of those investments. Accordingly, the use of EVA to measure performance could incentivize management to pursue projects with quick returns, rather than the multi-year investments that a company may actually need to make in order to realize long-term, sustainable growth.

For this reason, we believe that ISS’s use of EVA may actually promote short-termism, rather than the long-term outlook necessary for sustainable value creation—and for a focus on the sustainability issues that are critical in the current environment.

The memo says companies should review EVA information that was included in ISS’s 2019 proxy voting report and compute similar metrics for 2020.  Based on that analysis, a company should consider whether to prepare any disclosure for inclusion in its 2020 proxy statement in anticipation of ISS’s assessment.