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 ongoing 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.