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How Successful is Your CEO?

To be a top value creator, a CEO must deliver a high total shareholder return in a large company for a long time.

There are many ways to view a CEO’s success, but one fairly simple indicator is the longevity of his or her reign as the chief executive.  Admittedly some ineffective leaders keep their job for a while but those CEOs that last two or three or even four decades are generally very successful. 

For example, consider Howard Solomon who has been CEO of Forest Laboratories since 1977.  By virtually any benchmark, Forest Laboratories has been an outstanding company over this 36 year period.

Mr. Solomon navigated successfully in a dynamic industry seemingly in a perpetual state of technological and market transformation.  The pharmaceuticals landscape is littered with companies that were once thought to be stars but are now gone.  In this survival-of-the-fittest world, Mr. Solomon has proven to be quite fit and has endured a very long time (though former Bausch & Lomb CEO Brent Saunders will be replacing Solomon, due to retirement, on October 1st).

Another way to judge CEOs is by the total shareholder return, or TSR, they deliver for shareholders.  The TSR measure reflects dividends and share price appreciation as a return over time.  It can be calculated on an annual basis and it can be compounded over the years. 

Forest Laboratories, for example, has had a share price in the $44 range recently but if you go back to 1977, the share price was about $0.03 on a split adjusted basis.  This translates into a TSR of over 170,000% which is about 23% per year compounded over 36 years.  This is such a strong performance against the S&P 500 return of 8% per year over the same period that an investment in Forest Laboratories when Mr. Solomon took over would be worth over 100 times as much today as a similar investment at that time in the S&P 500 index.

Although TSR seems a cut and dry measure of success, it can be hard to compare companies.  For example, would investors as a group have been better off in Howard Solomon’s Forest Laboratories or would they have been better off over the 10 plus year reign of Jeff Boyd as CEO of priceline.com? 

Mr. Boyd’s priceline.com delivered 54% per year when the S&P 500 delivered only 6%.  But he only did it for 10 years versus Mr. Solomon’s 36 years.  Which is better?  What are the implications of the fact that priceline.com has a market capitalization that is four times Forest Laboratories?

The Financial Times Global 500 ranks companies based on the size of their market capitalization which is simply the number of shares outstanding times the value of each share.  Many would rightly argue that market capitalization alone doesn’t dictate success.  In fact, perhaps the easiest way to build a company worth $400 billion is to start with a company worth $600 billion, but we would hardly deem this as a success.

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