Beyond a concept, performance needs a measurable outcome variable or metric. At the most general level, metrics must satisfy certain properties, such as;

  • Relevance. Metrics must reflect the responsibilities of executives: long-term, strategic, bottom-line.
  • Controllable. Executives must be able to take purposeful action to drive the metric, yet not be able to game it.
  • Measurable. The metric must be measurable and accurately reflect performance.
  • Consistent. The metric must be consistent over time and across companies.


A recent proposal in the literature aimed at this is the long-term investor value appropriation metric, or LIVA for short¹. The recently introduced LIVA metric (Wibbens & Siggelkow, SMJ 2019) accurately captures;

  • Absolute financial value creation,
  • Over a long horizon
  • For the entire shareholder base
  • Relative to the value development of a market portfolio investment.


As a matter of principle, both accounting and share-based metrics could satisfy these criteria. In practice, the actual metrics employed often do not.

The key distinction between share-based and accounting metrics is the extent to which they are forward- and backward-looking respectively. As a shorthand, equity-based performance is a combination of current (annual) accounting performance and expectations of future performance.

From a long-term investing perspective, this forward-looking nature of share-based metrics is useful as it allows executives to sacrifice current (accounting) returns in exchange for expected future (accounting) returns that will be reflected in equity valuations (share performance). As a shorthand again, Tesla’s equity returns are high now not because they are profitable now, but because they are expected to be in the (long-term) future. But, of course, there is a trade-off. Expected returns do not always materialise and investors may suffer from bouts of optimism or pessimism that (hopefully) do not affect accounting performance. Conversely again, however, a real economic downturn will actually depress firm profitability – both in terms of equity valuations and accounting returns.

From the perspective of an investor, what matters most are actual delivered returns through value appreciation of shares and cashflows attributable to investors. This implies a preference for share based performance metrics given that it is most directly tied to investor outcomes. Care should be given, however, as to ensure that short-term fluctuations in equity valuations become the driver of corporate and investor behaviour.

Financial performance metric candidate: LIVA

A recent proposal from the literature to better measure long-term value creation for shareholders is the LIVA metric, calculated as

Where Vt  is the market value of an investment at time T, Vo the market value of an investment at time O, and FCFt the cash flows flowing to investors over the entire holding period, discounted by a market return r.  In essence, it is a backward looking net present value of an investment.

Holding companies to the yardstick of LIVA yields a different picture of top performers over the last 20 years as for instance ROA or annualised excess returns (ER). The best companies in terms of ROA or ER are small and as a result boast high ROAs or ERs. In the case of ROA for instance, top performers are often natural resources royalty trusts. In the same dataset, the best performing companies according to LIVA are well known for their success over the past two decades such as Apple, Amazon, Tencent, Alphabet, and Samsung.

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1 Wibbens & Siggelkow, (2020), Introducing LIVA to measure long-term firm performance, SMJ , Forthcoming, 1-24.