Buy the Boss -- or the Company?
Sure, CEOs affect how your stocks perform. Does that mean you should consider who the CEO is before you pick an investment?
Before you go home tonight, take a look around your company. How much of its success is attributable to you personally? How much, on the other hand, has to do with being in the right industry, having the right team, or getting lucky breaks? Don't be modest. Many owners of small companies can truthfully say they got where they are largely through their own efforts. Who else is even there at 8 p.m.?
Now peer into your retirement portfolio -- the section with your investments in those big buy-and-hold-type companies. Those outfits have tens of thousands of employees, billions of dollars in revenues, and operations around the world. How much of their performance should be credited to the boss? In recent years we've been pushed to think that the answer is, again, quite a lot. But that's because of a conspiracy to make us forget what may be the pithiest piece of investment advice ever: invest in companies an idiot can run, because sooner or later an idiot will.
The conspiracy, I hasten to add, was unintentional -- which is the worst kind. It was already spreading when Fidelity's Peter Lynch penned the "idiot" tip back in 1989, and it seduced more and more of us as value investing went into its end-of-the-century eclipse. To make CEOs more accountable, we tied their pay packages to the performance of their stocks, producing some preposterous paydays and (in a crazy bull market) a sense that CEOs are like cleanup hitters who set new home-run records yearly. To make complicated enterprises more understandable, we encouraged CEOs to articulate a vision, project an image, and generally blur the boundaries between themselves and their companies. Meanwhile, as the stock-market value of companies way outstripped the worth of their hard assets and cash flow, researchers at universities and consulting firms got to work on valuing "intangibles" -- management-leadership skills prominent among them. Public-relations giant Burson-Marsteller even launched annual surveys exploring the relationship between a CEO's reputation and shareholder value. Burson's 2001 report found that the public perception of a company's CEO was a key factor influencing the generally held opinion about that company. A year earlier an amazing 94% of the financial and industry analysts Burson queried said they'd recommend a stock based on the CEO's reputation.
Well, better the CEO's rep than underwriting fees. But as long as we've ditched so much other new-economy claptrap, why not get real about what CEOs do contribute? Better yet, why not ask if we investors should even think about the CEO when evaluating a stock?
It isn't a matter of being pro-idiot -- Lynch certainly isn't -- but of refocusing on such fundamentals as strong franchises and high barriers to competition when you're gauging a company's chances for long-term success. Such fortifications are most apparent in familiar, easily understood companies like General Mills, which in 2000 added Pillsbury to a roster of brands that already included Betty Crocker and the Cheerios my family buys each week. But the fundamentals are crucial in assessing even a complex financial-services giant like Citigroup. It's nice that CEO Sanford Weill is highly regarded, but it matters much more that Citigroup has an array of businesses (from banking to credit cards to stockbrokerage to insurance) and a global presence that none of its competitors can match.
It's easy to count the General Mills brands on the supermarket shelf (28) or the number of countries where Citigroup has embedded itself (more than 100). It's a lot harder to identify a CEO who is truly making a big difference. In his best-selling book Good to Great, Jim Collins analyzes 11 companies that during a 15-year period outperformed the general stock market by a factor of three or more -- a better record than the one compiled by Jack Welch's GE. Collins concludes that what he calls "level five" leadership was one of the major factors in their success. His heroes include Darwin Smith, who put Kimberly-Clark into disposable diapers in 1978, and Alan Wurtzel, who led Circuit City to become a retail-electronics powerhouse in the 1980s and 1990s. But don't expect to find such leaders on CNBC doing the vision thing. According to Collins, they tend to be strong-willed but self-effacing company lifers, publicity shy and more ambitious for their companies than they are for themselves. "It's hard to categorize someone as a level five when they're in the middle of things," says Collins. Which is to say, as an investor you probably couldn't find one of those characters if you tried.
Far easier to spot -- and thus to avoid -- are the celebrity CEOs, especially the ones who have been brought in with great fanfare to change a company's direction. Think about it: had you owned AT&T when Michael Armstrong arrived, in November 1997, or Hewlett-Packard when Carly Fiorina took charge, in July 1999, a good strategy would have been to ride the run-up that the stocks experienced as investors indulged in their rescue fantasies -- and then sell. Charisma is no match for the disappearing profit margins of the long-distance-telephone and PC businesses, and it takes more than vision to break into broadband or big-time consulting.
Don't get me wrong. I do believe in leaders with smarts and determination -- it's just that they're a lot harder to recognize than a good product and sound finances are. And if you can't recognize them, how can you invest in them?
So is there a time and place for the Great Man theory of investing? Maybe. But I suspect it was somewhere in northern California, about four or five years ago.
Copyright © 2002 Kenneth Klee
Kenneth Klee is a freelance writer based in New Jersey.
The Inc Life
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