Why
Great Management Matters
The character of the people who manage the company you own will, in
many ways, predict the quality of the investment you have made. We feature some
of our favorite managements to help you in your search for great corporate
leaders.
By
But, do you ever stop to
consider who's minding the store?
When you buy a stock,
you're getting a whole lot more than just a ticker symbol to root for. There's
an actual business behind the stock you buy, a business with products,
services, assets, obligations, and people. The people in charge of the
enterprise -- the managers, the executives, and the board of directors -- far
more than any other factor, have the greatest impact on the success or failure
of the company.
What makes a great CEO?
Apart from honesty and integrity, there are no hard rules. The bold behavior we
might admire in a Silicon Valley gunslinger could be considered reckless
in an industry where a more sober business approach is required (if Steve Jobs
is ever named head of Goodyear Tire & Rubber, sell!), but
ultimately the executives we admire are the people who, one way or another,
have managed to get the job done.
The character of the
people who manage the company you own will, in many ways, predict the character
of the investment you have made. Every investor can look for certain qualities
to admire in a corporate leader, and you might even develop a list of
characteristics to look for in the managers of the companies you are
considering for your portfolio.
That's exactly what our
team of Fool writers has done. In this article, we name our favorite business
managers and some of the reasons why they've earned the reputations they enjoy.
Some are admired for their fearlessness in taking an industry into uncharted
territory. Others earn respect for their deep understanding of the process of
managing their corporate brand, and still others for their ability to see
what is important in a miasma of conflicting economic signals. Above all, these
managers have succeeded in creating value for their shareholders, often by
organizing their resources in ways no one else in their industries had ever
previously attempted.
Consider this your
invitation to begin your own study of the traits of successful business
leaders. When you become familiar with the characteristics that lead to success
in business, you're more likely to recognize them when you are looking for
companies you'd like to own.
Charles Schwab
& Co.: No Fear
Charles Schwab the man and Charles Schwab (NYSE:
SCH) the company should be recognized for a "no fear" attitude.
Schwab and co-CEO, David Pottruck, displayed this attitude when they dropped
online commissions to a third of phone- or live-broker-based commissions, even
after they calculated that it would cost the company $125 million a year in
foregone revenue. These men understood that the market was changing and they
could be the first to change or the last. They chose wisely and catapulted
their company to the top of the online brokerage industry, never to look back.
Not only did Schwab take
an immediate hit from a short-sighted Wall Street for deliberately threatening
its own revenues, but it took the change one step further. Schwab eventually
restructured the entire company, placing its online services at the heart of it
all. At year-end 1995, Schwab had a market cap of $3.6 billion; today it is
worth more than $40 billion. Nice gamble.
-- Todd Lebor, TMF
Teetime
Enron: Visionary
Action
The jester cap comes off to Enron's (NYSE:
ENE) management team for its visionary action. As I wrote in a December
2000 Rule Maker column,
this former monopoly turned itself into one of the most dynamic and
free-thinking organizations of the last decade, perhaps even the century. Led
by CEO Kenneth Lay and COO Jeffrey Skilling, Enron, the second-largest operator
of gas pipelines in the U.S., found itself making a market for the hottest
commodity around -- bandwidth.
These guys recognized
that Enron's expertise was in market making. They had been doing it for years
with commodities such as natural gas and electricity -- why not bandwidth? They
also capitalized on their rights-of-way easements along the nation's railroad
tracks and built a nationwide fiber optic network of their own. Today, Enron
claims to do $200-$300 million per day ($30 billion annually) in B2B
e-commerce, making it the largest Internet commerce site on the planet. Not bad
for a narrow-minded, tunnel-visioned utility, eh?
-- Todd Lebor, TMF
Teetime
Starbucks:
Knowing Your Brand
One of Starbucks' (Nasdaq:
SBUX) greatest strengths is the management's focus on the Starbucks brand.
Chairman and Chief Global Strategist Howard Schultz's vision is of a brand that
represents quality coffee and friendly customer service, but more important, a
location where people can get together, relax, and enjoy life. The stores were
designed to convey this image, and it has been widely accepted in the U.S.
Recently, Starbucks has
taken this vision and turned it into a worldwide franchise, chalking up
successes in such diverse cultures as the U.S., Japan, China, and even Kuwait.
Most impressive to me is that Starbucks never deviated from the core Starbucks
"experience," even in all of these different cultures. In fact, the
company ignored most of the advice it received from consultants prior to
entering the Japanese market because that advice was contrary to Starbucks'
brand.
The result was
faster-than-expected profitability and stores three times busier than their
North American counterparts. Starbucks' success in Japan shows how crucial
it is to focus on the brand and consistently communicate that brand to all
customers. More importantly, it shows how essential it is for management
to trust their gut in the face of contrary advice.
-- Bob Fredeen, TMF
Bobdog
eBay: Patience Is
a Virtue
I admire management at eBay (Nasdaq:
EBAY) because it is moving at its own efficient, but not rushed, pace in
building its business. Also, eBay is not following the crowd, doing what all
the other new online businesses are doing. In the fall of 1999, when literally
dozens of new e-companies were advertising on television (blowing through their
venture capital funding in the process), eBay didn't run any TV ads. More than
a year later, in late 2000 -- when very few e-companies were advertising on TV
-- eBay decided to finally test ads in ssome markets. Management stated that the
benefit now was that eBay's ads would not get lost, because new companies
were no longer advertising in droves.
eBay is also expanding
internationally and into new businesses at its own pace. Management is learning
in-depth about new markets before launching new sites, even if competitors are
already in those markets. CEO Meg Whitman reminds investors, "This is a
marathon, not a sprint." eBay is systematically building a long-term
business. It is not following the latest fads, and it is expanding at a
sustainable, smart, and internally controlled pace.
-- Jeff Fischer, TMF Jeff
Cisco Systems: A
Deep Bench
When you buy the shares of a company intending to hold for the long term,
you're saying that you believe management can execute and deliver on its
business model. So, not only do you want a top-notch person leading the
company, you also want to make sure that there are qualified people to fill in
should anyone leave. Cisco System's (Nasdaq:
CSCO) management team is one of the deepest you'll find.
Over
the past year, Cisco lost three of its top managers without
skipping a beat. When its Chief Technology Officer left, there was a
six-year veteran ready to step in and fill her shoes. The same thing happened
when its Senior Vice President for the Enterprise Line of Business departed and
was replaced by a 10-year veteran. Although it may take more than one person to
fill the role, Cisco also should be able to overcome its most recent loss of
number-two man Don Listwin, who went on to become the CEO of one of Cisco's
business partners. Cisco CEO John Chambers already has people on hand who
can step in and assume his responsibilities.
Coca-Cola: A
Strong Board of Directors
I love to see a very strong and respected board of directors in a company
I am thinking of investing in. In my opinion, no company has a stronger
board than Coca-Cola (NYSE:
KO). Just the presence of respected investors and leaders like Warren
Buffett and Sam Nunn speaks volumes.
A strong and experienced
board of directors is necessary to keep the CEO and president accountable
for their decisions. Recently, when Coke's management tried to buy Quaker Oats,
Warren Buffett stepped in and rejected the deal. This showed me that he has no
problem stepping up to the plate when he disagrees with management.
Lucent Technologies (NYSE:
LU) is an example of a company with a very weak board of directors.
Lucent's directors allowed management to get away with some very questionable
decisions regarding purchases that were very dilutive to the shareholders and
turned out to be disastrous for the company. So, the lesson I hope everyone
will take away from this is to pay attention to the board of directors.
-- Peter Psaras, TMF
Mycroft
Siebel Systems:
Forging a Value Chain
Siebel Systems (Nasdaq:
SEBL) has ascended to dominance in the customer relationship management
(CRM) software market by forging a strong value chain of partners. Tom Siebel
often refers to the "Siebel ecosystem," an indication that Siebel is
in tune with the competitive environment of the new millennium.
"Co-opetition," or an ecosystem of companies that can deliver their
own comparative advantages to the whole product, is often far more productive
and profitable than cutthroat competition.
Strategic alliances are
pacts that allow a firm to develop a leadership position, and a leadership
position only. Second place in technology markets means only that you are the
first loser, and Siebel understands this very well. Siebel's ecosystem
includes more than 600 companies through which Siebel conducts joint
marketing, selling, training, customer service, and a host of other activities.
Many of these companies are leaders in technology and system integration, such
as IBM (NYSE:
IBM) and PriceWaterhouseCoopers. As a result of its extensive partnerships,
Siebel has captured the dominant market share and mind share in the rapidly
growing CRM sector.
-- John Del Vecchio, TMF
Fuz
Oracle
Corporation: Reinventing the Business
Several years ago, Oracle's (Nasdaq:
ORCL) database and enterprise resource planning application sales were
slowing. CEO Larry Ellison identified the Internet, not the PC, as the single
greatest investment opportunity the technology industry had ever seen. He
responded by reinventing all of Oracle's existing products and developing a
full suite of software applications that allow businesses to run all of their
operations, internally and externally, over the Web. He took further action by
recognizing the tremendous opportunities in B2B e-commerce. Oracle's strategy
has been successful thus far, moving into business segments where competitive
advantages exist. It continues to increase application sales and as B2B and
online exchanges continue to grow, Oracle will leverage existing database
clients toward new products.
Ellison's innovation is
primarily responsible for Oracle's success thus far. He saw an opportunity to
create a single product that could compete in multiple software segments and
seized it. He saw an opportunity to leverage Oracle's existing database
business and gain traction in the B2B e-commerce market and seized it. In a
Silicon Valley second, Ellison had put Oracle through the spin cycle. The
client/server application days were done and the Internet was driving its
products. When technology takes the next sharp turn, it's a safe bet that he'll
be directing traffic. Entering new businesses and reinventing products are what
Ellison does best.
-- Mike Trigg, TMF Tonto
Yahoo!: Clarity
of Focus
When looking at Yahoo! (Nasdaq:
YHOO) as a business, one strength of the company's management is their
clarity of focus. In other words, they know what business they are in and what
businesses they should be in. Just as important, they know what businesses they
don't want to be in. They have resisted all temptations to grow their business
in ways that don't necessarily contribute to their company's vision of
"connecting anyone, anywhere, with anybody or anything."
One of Yahoo! CEO Tim
Koogle's oft-repeated pearls of management wisdom is the constant striving to
"get real clear on what we want to accomplish, and then communicate that
clearly to every person in the company." While Yahoo!'s stock is currently
suffering along with the rest of the dot-com crowd, Yahoo!'s clarity of focus
will ensure that this company emerges with an even stronger claim to the
eyeballs and, eventually, the wallets of Web users the world over.
-- Zeke Ashton, TMF
Centaur
Berkshire
Hathaway: Honesty and Integrity
One reason that I am a shareholder in Berkshire Hathaway (NYSE:
BRK.B) is the integrity and honesty of the company's management. Warren
Buffett and Charlie Munger always tell it like it is, and always provide
investors in the company "the same amount of information we would like if
our positions were reversed." One very impressive recent example of this
is the fact that Buffett waited to inform shareholders of the company's
financial results before announcing that the company would be buying back stock
at a certain price. This ensured that no shareholder would sell their shares
back to Berkshire without the benefit of the most recent information.
Moreover, Buffett makes
the effort every year in the company's annual report to explain the business to
shareholders, and any poor performance is highlighted rather than swept under
the rug. In short, Berkshire Hathaway investors are treated with the respect
that one would accord partners in the business. In today's world of restating
revenues, shareholder lawsuits, and creative accounting, being a Berkshire
Hathaway shareholder means being able to trust in a management that operates
with integrity.