Rethinking Managerial Performance Beyond Shareholder Return

Mihir A. Desai, Mark Egan, and Scott Mayfield present a compelling argument for a new approach to assessing managerial performance. Total shareholder return (TSR) has been a longstanding metric, but the authors propose a shift towards core operating shareholder return (COSR) to provide a more accurate and fair evaluation. Let's delve into why and how this shift is crucial.

The Limitations of Total Shareholder Return (TSR) 🚧

TSR has been the go-to measure for public companies, but it has significant flaws. It conflates managerial performance with market-based factors, like dividends and buybacks, which can distort the true picture of a manager's effectiveness.

The Proposal: Core Operating Shareholder Return (COSR) 🌟

COSR is designed to focus purely on the value created through operations, excluding the influence of dividend and buyback decisions. This measure can serve as a more precise indicator of operational performance.

Understanding COSR in Practice: The Case of IBM 🏢

An examination of IBM’s performance using COSR reveals a much healthier picture than TSR suggests. This is because COSR adjusts for dividends and buybacks, showing the actual operational success of the company's managers.

The Impact of COSR on Managerial Decision-Making 🤔

Adopting COSR could lead to a shift in focus for managers, encouraging them to concentrate on improving operational performance rather than financial engineering or market timing through buybacks.

Addressing Potential Objections to COSR 🛡️

While COSR may seem to neglect managers' ability to time the market with buybacks, it actually provides a clearer picture by separating operational performance from market-based factors. It's a more realistic approach to handling cash distributions and can be tailored to specific industries or broad-market indexes.

The Future of Managerial Assessment: Shifting the Focus 🚀

The adoption of COSR could lead to a more honest and effective system of evaluating managerial performance, focusing on real value creation and operational success.