All companies that had a market capitalization in excess of $US 2 billion as of Oct 1, 2012
First screen: Eliminate all companies that did not disclose at least 75% of the ‘priority indicators’ in their respective industry group for performance year 2011. A priority indicator is any of the 12 key performance indicators (KPIs) used in CK’s research model that is disclosed by at least 10% of all companies in an industry group. Since CEO pay is not widely tracked by Bloomberg, the disclosure test for KPI # 7 was based exclusively on total wage bill. KPIs 6, 11 and 12 are not used in the first screen as they are either universally disclosed or applicable to a subset of companies.
Second screen: Eliminate all companies with an F score below 5. The F-Score (the Piotroski F-score) is a measure of the financial strength of a company. The F-score is the sum of the scores for each of nine tests. Each test scores one for a pass and zero for a fail. The tests are: i) net profit is positive; ii) operating cash flow is positive; iii) net profit ÷ total assets at beginning of year, minus the same number for the previous year is positive; iv) operating cash flow is greater than net profit; v) long term debt ÷ by average assets has not increased; vi) the Current ratio has increased (the change is more than zero, so even a negligible increase passes the test); vii) no raising of ordinary (common) equity over the previous year: this test is passed if the company did not issue any ordinary shares; viii) gross margin has improved over the previous year; and ix) asset turnover has increased.
Third screen: Eliminate all companies with a Global Industry Classification Standard (GICS) sub-industry classification that relates to the manufacturing or distribution of tobacco products or armaments. The relevant sub-industries include: i) Aerospace & Defence; and ii) Tobacco. In the case of Aerospace & Defense, the company will be eliminated if it derives a majority of its revenue from its Defense business.
Fourth screen: Eliminate all companies that are bottom quartile performers in the CK Financial Sanctions screen. The CK Financial Sanctions screen measures the amount of money that companies have paid out in qualifying fines, penalties or settlements on a trailing one-year basis. Companies that pass the CK Financial Sanctions screen may be reassessed during the October 2012 to January 2013 timeframe.
Approach for fourth screen: A keyword search for “fines, penalties or settlements” is run for each company using Factiva and Lexis Nexis.5 Payouts may relate to legal repercussions from environmental accidents, generalized environmental pollution, infringement of labor standards, human rights-related abuses, child exploitation or violation of collective bargaining arrangements. Payouts that occurred from October 1, 2011 to October 1, 2012 are totaled and converted to USD6, and then divided by total revenue reported from Q4 2011 to Q3 2012. The resulting ratio is then percent-ranked on an industry group-specific basis, such that companies are only compared against their industry group peers. Those companies that receive a bottom quartile percent score (e.g. 25% or below) are eliminated.
Companies that pass the fourth screen constitute the 2013 Global 100 Shortlist. The 100 companies in the 2012 Global 100 are automatically included in the 2013 Global 100 shortlist.
Selection Criteria: Companies in the shortlist are analyzed using CK’s standard research model, with the latest performance year being 2011, and with data that was available on or before October 1, 2012. The 2013 Global 100 will be comprised of the highest ranking companies in the shortlist subject to each industry group’s ‘cap’. Each GICS sector will be allotted a fixed number of slots in the 2013 Global 100, based on each sector’s market capitalization-weighted contribution to the MSCI ACWI on October 1, 2012. The GICS sector is used instead of the GICS industry group due to the relatively small number of sectors (n = 10), the large number of industry groups (n = 24) and the resultant effects on portfolio concentration.
CK’s research model is comprised of 12 key performance indicators (KPIs). Companies are only scored on the ‘priority KPIs’ for their respective industry groups. In industry groups where all 12 KPIs are deemed to be priority KPIs, each KPI will have a weight of (100%/12) = 8.3%
Key Performance Indicators (to view complete descriptions of each indicator, visit the Global 100 website):
1. Energy productivity: Revenue per gigajoule of energy consumption.
2. Carbon productivity: Revenue per metric tonne of direct/indirect GHG emissions.
3. Water productivity: Revenue per cubic metre of water withdrawal.
4. Waste productivity: Revenue per metric tonne of waste produced.
5. Percentage tax paid: Taxes paid in cash, as a percentage of EBITDA.
6. Leadership diversity: Percentage of women on board of directors and in executive management.
7. Clean capitalism pay link: At least one senior executive’s compensation tied to clean capitalism-themed performance targets.
8. CEO-to-average worker pay link: How much more CEO gets paid (expressed as a multiple) compared to average worker.
9. Safety performance: Lost time injury rate and number of fatalities.
10. Innovation capacity: R&D expenditure as a percentage of revenue.
11. Employee turnover: Company’s employee turnover rate is calculated, then percent-ranked against that of the same industry group peers.
12. Pension fund status: For applicable companies, Unfunded liabilities at year end 2011 by market capitalization are divided by market capitalization at year end 2011. This amount is then percent-ranked against that of all same-industry group peers within the CK coverage universe.
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