ISS has acquired research firm EVA Dimensions in order to help investors "determine the intrinsic value or risk of portfolio companies," according to ISS President and CEO Gary Retelny. EVA Dimensions, founded in 2006 by former management consultant Bennett Stewart, ranks companies against peers and the market based on Economic Value Added (EVA) performance and wealth generated for shareholders. EVA is a measure of economic profit that takes into account the cost of capital invested in assets. The firm also uses a stock ranking model that quantifies risk-adjusted EVA performance relative to a company's current market value.
The purchase of EVA Dimensions comes at a time when ISS has been broadening its focus on performance metrics beyond just TSR, primarily through the addition of the Financial Performance Assessment (which ranks company pay and performance across three or four financial metrics) to its quantitative pay for performance screen. Mr. Stewart, the firm's founder, has long argued that EVA is a better measure for executive incentive plans than TSR or even other financial metrics such as EPS, since it has a strong line of sight to executives and is able to measure the quality of earnings by taking into account cost of capital. In addition, he argues that EVA is a primary driver of TSR due to its link with net present value, noting, "If TSR is the question, EVA is the answer." It seems likely that ISS will look to incorporate EVA into its own pay for performance calculations at some point, demanding further attention and education on the part of companies to understand the metric itself as well as how their company compares to peers.