“Core Earnings” Measure Alters Landscape
New
Measure of Profitability will bring honesty to Corporate Earnings
In late May of 2002 Standard & Poor's published a set
of new definitions it will use to evaluate corporate earnings.
At the center of Standard & Poor's effort to return transparency
and consistency to corporate reporting is a focus on what
it refers to as Core Earnings, or the after-tax earnings generated
from a corporation's principal business or businesses. Since
Standard & Poor's believes that there is a general understanding
of what is included in As Reported Earnings, its definition
of Core Earnings begins with As Reported and then makes a
series of adjustments.
Included in Standard & Poor's definition of Core Earnings
are expenses for employee stock options grant expenses, restructuring
charges from on-going operations, write-downs of depreciable
or amortizable operating assets, pensions costs and purchased
research and development. Excluded from this definition are
cash flows generated by impairment of goodwill charges, gains
or losses from asset sales, pension gains, unrealized gains
or losses from hedging activities, merger and acquisition
related fees and litigation settlements.
For too many years CEOs have been more concerned about the
price of the shares they hold in the Company, and far too
unconcerned about the long-term success of the core business
itself. Too many executives have gotten rich in a bull market
on money made on mergers and acquisitions, and too few on
producing useful products for consumers who need them.
To be sure, there is a place for compensating managing officers
with stock in the Company, and stock options can be an important
incentive tool. But it is this long-term perspective that
will in the end hand the advantage to the Asian businessman
who plans and operates in terms of generations, not quarters.
S&P’s move to report the “core earnings”
as a measure of the success of the management team in running
the business is a giant step toward honesty and integrity
in the world of business - both large and small, and will
do much to improve the competitive health of future U.S. business.
We here applaud it. |
