What’s the Best Way to Create Long-

FINANCE & ACCOUNTING

Term Value?
by Nicolaj Si elkow and Phebo Wibbens
October 15, 2020

Image Source/Getty Images

It’s a well-known paradox. Most executives are committed to the idea of maximizing long-
term shareholder value, but when they want to track and improve performance, they focus
on a dizzying variety of short-term measures (and acronyms). ROA. ROC. TSR. EBIT.
EBITDA. CAR. EPS. We could go on.

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Why this focus on short-term measures? In large part, because they’re easy to obtain, easy
to use, and have been widely used in the past. The problem, as studies have long made
clear, is that optimizing short-term accounting measures and ratios often doesn’t
maximize long-term value. To think clearly and effectively about long-term value,
companies need a better measure — and, as we write in a recently published article in the
Strategic Management Journal, we’ve devised one that we call LIVA, short for Long-term
Investor Value Appropriation.

The idea behind LIVA is simple: Add up the net present value of all the investments a firm
has engaged in over a long period of time. The key insight from our analysis is that this can
be done by using publicly available stock-market data. LIVA uses historical share-price
data to calculate the value a company has either created or destroyed for its entire investor
base over a long time period.

To see what LIVA can do, consider the case of Apple. Imagine you were fortunate enough
to have bought 100 shares of the company’s stock in 1999. If you had reinvested any
dividends and sold your shares 20 years later, you would have made an annualized return
of 27%, well above the market average of 6%. That’s a healthy return, but hardly
spectacular. In terms of total shareholder returns (TSR), it ranks 3,175th among companies
worldwide over this time period — a ranking that would seem to suggest that Apple’s
success hasn’t been very exceptional. One might derive the same conclusion from the most
recent “Value Creators Rankings,” published annually by the Boston Consulting Group,
which is based on five-year TSR and ranks Apple #34.

The problem is that TSR doesn’t actually measure long-term value creation for the entire
shareholder base over a particular time period, but only the returns for those who held (a
certain number of) shares over the entire period. LIVA, however, takes into account that
the capital base of a company can change over time. In doing so, it provides a very
different sense of the value Apple has created. If in 1999 you had bought the entire
company at its then-market price, accounted for any cash received through dividends or
share buybacks, and gone on to sell it 20 years later at its much-improved market price,
you would have been more than a trillion dollars richer than if you had invested the same
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amount of money in an index fund. Apple’s LIVA over this period, in other words, was
more than $1 trillion. That’s truly dominant performance that makes Apple the world’s
number-one company in our ranking, with a LIVA 57% higher than that of Amazon, our
number-two company.

Those rankings come from a global LIVA database we’ve created to help managers and
researchers identify the best- and worst-performing companies by country, region, and
industry. The database tracks the performance during the past 20 years of more than
45,000 companies that had at least $100 million of initial market capitalization and for
which data was available for at least five years. It allows analysis of value creation at the
level of individual companies, industries, and countries.

A comparison with traditional performance measures shows how much more revealing
LIVA is, as becomes clear when you look at the top and bottom 10 performers as
determined by each method.

Value Creators: The Global Top 10

According to three different measures.
Long-term investor value appropriation (LIVA)
Rank Company LIVA (US $B)
1 Apple $1,002
2 Amazon.com 637
3 Tencent Holdings 375
4 Alphabet 315
5 Samsung Electronics 277
6 UnitedHealth Group 255
7 ExxonMobil 239
8 Visa 215
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9 Genentech 212
10 Nestlé 207

Annualized excess return

Rank Company LIVA (US $B) Excess return (annualized, %)
1 Pharmasset $15.4 100%
2 Seaboard Associates 8.1 60%
3 Hermes Microvision (HMI) 3.1 8%
4 KEB Hana Bank 12.2 58%
5 Loxo Oncology 3.3 57%
6 Fevertree Drinks 2.9 54%
7 Ceska Pojistovna 4.0 53%
8 Plus500 2.4 52%
9 Public Finance Berhad 2.2 52%
10 Cementos del Valle 2.6 52%

Return on assets (ROA)

Rank Company LIVA (US $B) ROA (%)
1 BP Prudhoe Bay Royalty Trust $4.6 1400%
2 Permian Basin Royalty Trust 1.4 857%
3 Sabine Royalty Trust 1.7 773%
4 North European Oil Royalty Trust 0.4 443%
5 San Juan Basin Royalty Trust 2.2 257%
6 Rightmove 5.2 193%
7 Santa Fe Energy Trust 0.4 122%
8 LiveChat Software 0.03 115%
9 Plus500 2.4 107%
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 10 West Indian Tobacco 1.1 101%
Note: Top 10 lists based on a database of global firms in Compustat with at least $100M initial market capitalization and at least five years of
data available.
Source: Nicolaj Si elkow and Phebo Wibbens © HBR.org

The top five companies on our LIVA list are tech companies that together have created
more than $2.6 trillion in shareholder value in the past 20 years. If you look at the top
companies on the excess-return list, you’ll see that although successful, they haven’t
generated anything like that kind of value. They were able to achieve very high returns, in
fact, only because they started out small, with an initial average market capitalization of
$332M. For example, the market capitalization of the number-one company on the list,
Pharmasset, was $187M in 2007 and shot up to $11.2B in 2011, when it was acquired by
Gilead. (We’ve excluded companies with less than $100M in market capitalization; their
inclusion would certainly lead to even higher potential figures of excess returns.)

The top performers on the ROA list are also relatively small companies. That’s because an
extremely high ROA often does not reflect very high profits but rather very low balance-
sheet assets. The top performer on the ROA list is BP Prudhoe Bay Royalty Trust, a
company that distributes profits from oil- and gas-royalty rights, which have not been
capitalized on the balance sheet to their economic value. The company’s apparently high
performance is thus as much a reflection of accounting conventions as of good underlying
economic performance.

These examples show some of the potential advantages of using LIVA when assessing
long-term firm performance. Unlike measures based on ratios such as ROA, LIVA
determines the absolute size of economic performance without favoring initially small
companies. Unlike accounting-based return measures, it values both profits and growth.
And it never hinges on accounting definitions.

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If you were to look at just the 10 best LIVA performers, you might conclude that tech is the
place to create value. But one of the great advantages of LIVA is that it provides revealing
information not only at the top but also at the bottom.

Worst Performers: The Global Top 20

Annualized excess return
Rank Company LIVA (US $B) Excess return (annualized, %)
1 General Electric -$619 -9%
2 Lucent Technologies -502 -31%
3 American International Group -408 -18%
4 Time Warner (formerly AOL) -401 -4%
5 MCI (formerly WorldCom) -399 Bankrupt
6 Pfizer -369 -2%
7 Vodafone Group -343 -4%
8 AT&T (acquired in 2005) -285 -19%
9 Citigroup -271 -11%
10 Telewest -269 -47%
11 GlaxoSmithKline -244 -4%
12 Orange -241 -7%
13 BT Group -217 -7%
14 Lloyds Banking Group -216 -14%
15 AT&T (formerly SBC) -214 -4%
16 Aegon -211 -14%
16 Dell Technologies -211 -11%
16 Deutsche Telekom -211 -4%
19 Mitsubishi UFJ Financial Group -209 -7%
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 20 Wachovia -205 -19%

Analysis by end of listing type

Type LIVA (US $B) Share of total (%)
Bankrupt -$1,075 6%
Acquired -5,804 33%
Active -7,385 42%
Other -3,444 19%
Note: "Other" includes companies that were taken private, delisted from a secondary exchange (i.e., the listing continues at another stock
exchange), or delisted for reasons not recorded in the CRSP database.

If you look at the worst performers on our list, you’ll notice several tech companies:
Lucent, MCI/WorldCom, and AOL/Time Warner. These companies have destroyed a
remarkable amount of value in the past 20 years. In fact, in the aggregate the companies in
the category Technology Hardware & Equipment in our database had a LIVA of negative
$2.2 trillion. The only category that has destroyed more value is Telecommunication
Services. Other measures don’t reveal the extreme distribution of long-term performance
in the tech industry that our LIVA measure reveals — nor, by extension, do they prompt
questioning about why that distribution exists in the form it does. A LIVA analysis reveals
that a majority of companies in the tech industry actually destroy value. Only those
companies that dominate their respective sectors are able to create enormous shareholder
value — a consequence of network effects.

LIVA also provides a more meaningful way to think about bankruptcy than total
shareholder return and excess return do. In bankruptcy, after all, unless there is residual
value to claim for shareholders, those measures are always the same: −100%.

LIVA details the magnitude of the value destroyed in each case and therefore can serve as a
meaningful measure with which to analyze corporate decline. In this context, a striking
fact emerges when one uses LIVA to study the companies in our database: Only one of our
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top 20 value destroyers actually went bankrupt. It turns out that 42% of the value
destroyed from 1999 to 2018 was destroyed by companies that were still active in 2018,
and another 33% was destroyed by companies that were acquired. Companies that were
once successful often have a much longer time to destroy value than firms that go
bankrupt. If value destruction is a form of “failure,” then most of the failure is happening
at firms that still exist. This suggests that LIVA might be a valuable addition to the
bankruptcy and dissolution measures used regularly in industry-life-cycle and population-
ecology studies.

To create long-term value in the future, managers need to understand what strategies have
been successful in the past. LIVA provides a robust tool for knowing which companies in
various countries and industries have been able to create the most value and which have
destroyed it. With internal financial data, managers can use LIVA to identify the strategies
in their own companies that have paid off the most — an indispensable lesson that can
help them lead their companies and hopefully join the ranks of the global top LIVA
creators themselves.

Editor’s note: Every ranking or index is just one way to analyze and compare companies or
places, based on a specific methodology and data set. At HBR, we believe that a well-designed
index can provide useful insights, even though by definition it is a snapshot of a bigger picture.
We always urge you to read the methodology carefully.

Nicolaj Siggelkow is a professor of management and strategy at Wharton and a

codirector of the Mack Institute for Innovation Management. He is a co-author (with Christian
Terwiesch) of Connected Strategy (Harvard Business Review Press, 2019).

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 Phebo Wibbens is an assistant professor of strategy at INSEAD.

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