Today's Financial Times carries a letter from me about the subject of how to measure managerial performance.
This is a matter which has attracted a lot of attention as a result of the debate about executive pay. Having a yardstick of company performance which aligns the rewards for managers with the interest of investors is vital to this debate.
I have been amazed by the poor quality of the debate and the work on managerial incentives. Probably the most commonly used measure of fundamental performance is growth in Earnings Per Share or EPS. This is garbage: it takes no account of the amount of shareholders' capital employed to achieve that growth. This is a mistake that a novice investor choosing a bank savings account would avoid.
I was therefore pleased but slightly irritated to read that the Association of British Insurers, one of the trade associations which seeks to represent the interests of insurance investors, and which has expressed many views on executive pay, has said that growth in EPS may not be a suitable measure for this purpose. Neither is Total Shareholder Return, another commonly used measure, or even Return on Equity or ROE as it can be distorted by leverage or debt gearing. They are beginning to recommend Return on Capital Employed or ROCE. So are some institutional investors.
What is galling about this is that not only have I been saying that for about 20 years, but Warren Buffett said it in his 1979 Chairman's letter for Berkshire Hathaway. It has taken these self-appointed guardians of investors' interests a mere 33 years to catch up.
The next concept they may need to study is asset life or the duration of those returns. At their present rate of progress we can expect a result is 2045.