Ativo Capital

Rigorous Thinking


Financial and economic commentary reflecting Ativo’s world view:

More U.S. Firms Use Nonstandard Accounting Measures to Figure Executive Payouts

Monday, March 3, 2014

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Last Wednesday’s Wall Street Journal reported that an increasing number of firms are using non-GAAP measures as the basis for executive compensation awards. Despite the overall negative tone of the article, our perspective is that moving away from GAAP measures isn’t necessarily a bad idea.

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Trade, Labor, Capital, the Rich and "The Rich"

Tuesday, September 24, 2013

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Bloomberg writer Megan McArdle cites a recent Brookings paper addressing the long-term decline in labor’s share of U.S. national income. The Brookings paper refers to “import exposure,” which sounds like a fancy name for “cheap foreign imports.” Although there’s much more to the Brookings paper, and McArdle’s article, the bottom line seems to be that the U.S. share of wages is down because free trade allows offshore labor (in the form of imports) to undercut U.S. labor. So I asked myself the question, “What about cheap foreign capital?” Cheap foreign imports may hurt U.S. workers (although, yes, the pain…

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Sustainability a Fad?

Monday, December 5, 2011

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A book review in today’s Wall Street Journal had an “interesting” reference to corporate Sustainability efforts: “For all the talk of a “triple bottom line”—targeting people, planet and profits—few companies, in the U.S. at least, have truly taken their eyes off their stock price and quarterly profit.” The author’s implicit assumption is highly problematic. Of course companies are interested in making money! Far from being mutually exclusive, sustainability, when done right, can and does actually enhance shareholder value. Both the sustainability advocate and the corporate executive should realize that their efforts need not be at odds. In fact, a management focus on shareholder value is highly consistent with…

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Corporate Moneyball: Why the Right Metrics Do Matter

Sunday, November 6, 2011

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Guest Post by Clyde Rettig, Director, CharterMast Partners LLC The popular movie, Moneyball, based on Michael Lewis’s equally popular 2003 book of the same name, tells the true story of how the 2002 Oakland Athletics nearly made it to the World Series after applying nontraditional criteria to select new players. GM Billy Beane was trying to rebuild a team that had been decimated by departures of its best players to richer, big-market teams. The criteria the Athletics used, which can be characterized as actual performance metrics, were based on statistical analyses of target players’ historical on-base and run-scoring results…

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Warren Buffett: Always Know What YOUR Company Is Worth

Monday, January 31, 2011

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We can’t say it any better than Warren Buffett says it here: I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given. When…

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ESG/Sustainability Investors Should Engage Directly with Company Executives

Wednesday, September 22, 2010

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Guest Post by Pamela Styles, Principal, Next Level Investor Relations LLC Investors and company executives should be concerned about the lack of time and attention investor relations officers (IROs) feel they have available to understand the constructive and rapidly evolving investor attention to ESG (environmental & energy, social issues and corporate governance)/Sustainability factors in investment decisions, especially given estimates of related global managed assets that range from $18 to $27 trillion (see Rigorous Thinking or UN Principles for Responsible Investing reports.) Thoughtful assessments in two recent Rigorous Thinking postings do not overtly speak to the investor relations dimension, but…

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The Shareholder Value Case for Corporate Responsibility

Tuesday, August 31, 2010

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Aneel Karnani’s “Case Against Corporate Social Responsibility” (Wall Street Journal, 10/23/2010) misses a critical dimension of this issue. When it comes to measuring shareholder value, conventional financial metrics such as earnings and NPV fall short, failing to incorporate factors such as public perceptions, risk profiles, and investor preferences, which can have a significant impact on stock prices and the returns shareholders actually realize. For example, the UN Principles for Responsible Investing reports that its members manage $18 trillion of assets in 36 countries, with some estimates ranging as high as $27 trillion managed globally according to these principles. Values…

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Using Tobin’s Q Ratio To Assess the Market

Monday, July 19, 2010

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The Q Ratio has been getting more attention than usual lately (for example, articles by Smithers and Short). Conventional wisdom is that current Q Ratio levels significantly above long-term averages indicate that the market is substantially overvalued. Our view: The Q ratio is an extremely useful metric, but the conventional wisdom on the topic is wrong. From a practical perspective, equity prices are the biggest input that determines the Q ratio. (The other two components, corporate assets and debt, are relatively stable in comparison.) And equity prices are determined by two variables, economic earnings (Cash ROI) of corporate sector…

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Pay for Performance?

Monday, May 17, 2010

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It’s that time of year again. Now that the proxy statements are out and shareholder meetings are on the calendar, we’re seeing the latest round of articles and studies (such as this from Business Week) questioning whether CEO’s are being overpaid or underpaid for the performance they’ve delivered. One major concern with many such comparisons is that they define “performance” as Total Shareholder Return (TSR) over some arbitrary period. A critical (and obvious) problem is that TSR, by definition, requires specific start and end dates for the measurement period. Moving the start date or end date by even one…

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Does Good Corporate Governance Pay?

Monday, May 3, 2010

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The Economist website recently published an article addressing the linkage (or lack thereof) between good governance and returns to shareholders. Critics of reform point to a study by Lucian Bebchuk showing that test portfolios of well-governed firms no longer earn excess returns. Although we approach the issue differently than Bebchuk, we concur (at least generally) with his conclusions. Even though Bebchuk found no relationship between good governance and excess returns over the period studied, he did find a strong correlation between good governance and high Q ratios. This is eminently sensible. A high Q ratio is due to one…

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