Circle of Competence

I put up a new Reflection this evening on the use of ROIC metrics to improve and value an organization. Go over to Reflections on Value Investing and enjoy.

Here’s an excerpt:

Warren Buffett has made it clear that Return on Capital is one of the most useful metrics in evaluating the strength of a given company.

In an interview with the WSJ, LG CEO Yong Nam talks about how an organizational shift to ROIC thinking has improved the organization.

WSJ: What is the biggest change you’ve made in the operation of the company?

Mr. Nam: We changed the criteria for employee and management performance to return on invested capital rather than revenue growth. We have tried to make every individual in the organization sensitive to shareholder value. We introduced performance metrics as well as a signal-lighting system — green, yellow, red — so that everyone understands where they stand. We are also providing necessary financial information to them so they can make their own decisions.