| Hail to the Chief! |
Dateline: 11/30/98
If you ever wondered why CEOs make such huge salaries, think about this. The difference between a superior and a mediocre CEO can make or break a company. It can mean the difference between growth and stagnation. It can mean the difference, in some cases, between survival and bankruptcy. The Financial Post Magazine's annual CEO issue notes that the average salary for this elite group is roughly a half a cent for each dollar of profit generated, or $1.3 million. A lot of money to be sure, but usually worth every cent.
Warren Buffett, the Wizard of Omaha and second richest man in America after Bill Gates, made his fortune through investing. He synthesized two investment philosophies with astounding success. The first, as is generally well known, is the value investment philosophy of Benjamin Graham. Buffett was a student of Graham's at Columbia Graduate Business School and later went to work for him before striking out on his own.
What is less well know is the second key influence on Buffett, Philip Fisher. Buffett has said that his approach is 15% Fisher and 85% Graham. Fisher looked for two things in a good investment - superior growth potential and above average management. One of the key factors of good management is looking after the stockholders' interests.
Here are a few top executives who have grown their companies and increased shareholder value.
I became even more aware of the importance of such management when it was announced in 1996 that John S. Lacey had been appoiinted as the new President and CEO of WIC Western International Communications. As an employee of BCTV, WIC's flagship television property, I received a copy of the press release which noted that Lacey had previously been the CEO of Scott Hospitality and during his time there, had managed to increase shareholder value significantly. Lacey is one of those special talents that knows how to boost shareholder value and the hope was that he would be able to do for WIC what he had done for Scott.
WIC had just successfully deflected an unfriendly takeover bid during which time share value had climbed to $24. After the bid failed, the price declined to around $18. Some shareholders had complained that the shares should be valued at around $35 to $40 to recognize their true worth. But they were languishing due to internal management conflicts and a lack of clear direction.
The story at WIC was a complicated one that evolved after the patriarch and founder of the company, Frank Griffiths, passed away. Squabbles and conflicts between Griffiths children and management were rife. Control of the company was vested in Class A shareholders. The bulk of the company's share value, however, lay in the Class B non-voting shares. And media giant Canwest Global owned the largest single block of Class B shares. It attempted to engineer a takeover by challenging the vested control in the Class A shares, controlled largely by the Griffiths family.
The bid failed and John Lacey was brought in as CEO. During his two year tenure, WIC shares more than doubled in value, from $18 to $43 a share. How he did it is another story, but it was largely a question of focussing on the bottom line. Managing expenses, consolidating operations, and significant new acquisitions. In other words - a thorough housecleaning and restructuring. A subsequent change in Class A share ownership set the stage for a favorable takeover by Shaw Cable and Lacey resigned, his work done, to sail off to a new gig.
He went on to head up the Oshawa Group and is now leaving there after negotiating a good deal for shareholders in a merger with Empire Company Limited. Reading about his Oshawa-Empire dealing in the Financial Post gave me the bright idea that it might be worth keeping an eye on Lacey and seeing where he next lands, and then investing in that company. Right now his immediate plans are to take some time off to indulge in his hobby, building racing cars.
Some CEOs demonstrate their talent by building a company from the ground up to be a dynamo in the world of business. An excellent example is Kwok Yuen Ho, the founder of ATI Technologies. Recently named Canada's Entrepreneur of the Year, Ho built Ati from a garage operation into one of only three Canadian high tech companies generating over a billion dollars a year in sales.
He came to Canada in the early 1980s from Hong Kong. Unable to get a work permit, he decided to create his own work. He established ATI in 1985 and it was a struggle to get it going. "We worked long, long hours - seven days a week, sometimes 15, 16 hours a day," he told the Globe & Mail. Four months after starting the company, he and his partners had exhausted their initial $300,000 stake. Canadian banks turned him down, but finally he got additional financing from the Overseas Union Bank of Singapore (Canada) after only a thirty minute conversation. They staked him an additional $300,000 and two weeks later, they bumped that up to $1.5 million.
He also had to work hard to persuade U.S. computer manufacturers that a small unknown Canadian company could provide a product superior to that of the giants of Silicon Valley. Today companies from Compaq to IBM use ATI's graphics chips. ATI is listed as one of the Top 100 most influential companies by PC Magazine.
Ho is not likely to leave ATI, so investors wanting to profit from his genius can't go too far wrong by investing in the company. The stock has been languishing for the last six months after explosive growth during the last two years, but if you go by ATI's track record, it is a good bet to continue to grow in the future. See my profile on the company for more information.
The Financial Post Magazine's 1998 Review of Corporate Leadership in Canada named Paul Tellier, the dynamic head of Canadian National Railways as this year's CEO of the Year. When I read the blurb accompanying his picture, my first reaction was "No way!" for the caption noted that he was a former law professor (I have a jaundiced view of lawyers) and a former senior civil servant (I have even less regard for government bureaucrats). But that changed quickly on reading the article.
Praised by his political bosses (including both Trudeau and Mulroney) for his honesty, integrity and sharp mind, Tellier left the public service after being offered the CN presidency in 1992. The management at the moribund railway were not prepared for him. "They thought I was a stuffed shirt, that I would show up at 9 o'clock and take two hour lunches. They had not done their homework." Tellier told FP.
Before his arrival, CN had commissioned a study by the Chicago-based consulting firm, A.T. Kearney Inc. The report said CN had to cut 10,000 jobs in five years and streamline a "top heavy, obsolete, badly focused and excessively layered management structure". Five weeks after arriving at CN, Tellier had come up with an accelerated plan to lop 11,000 jobs within three years. The goal was accomplished.
To be sure, Tellier had much needed assistance from government. He worked with Transportation Minister Doug Young to abolish antiquated and restrictive legislation hampering the railway, including scrapping the Crow Rate subsidy that CN was required to provide grain farmers, and taking control of decisions on lines out of the political arena. This allowed Tellier to abandon or sell unprofitable short lines that were dragging down the company. Together, Tellier and Young disentangled the CN from the government and prepared it for privatization.
Tellier changed the focus of the company from "efficiency" to customer service. Efficiency had meant customers had to wait for service until there were enough cars assembled for an "efficient" run. Sort of like putting the cart before the horse. His biggest challenge though, was rejuvenating management.
"Every time I raised a question or made a suggestion," says Tellier, "they would give me 17 reasons it couldn't be done." Some managers were let go and new ones brought in. He reduced the number of management levels from twelve to five. He changed the style of management from a bureaucratic mindset to a business one.
In 1992 CN had an operating loss of $90 million. By 1993 Tellier had turned it around into a $202 million profit. Profit for 1994 was $457 million.
On November 17, 1995 CN was offered as an IPO on the New York and Toronto stock exchanges. It was oversubscribed eight times and opened at $3 over issue price. 42% of employees became shareholders at Tellier's urging. By 1997 profit was $807 million.
Tellier has streamlined CN into a pure railroad play competing with successful U.S. railroads. No trucking business, no passenger lines, no ships, no real estate, no telecommunications. Railroad pure and simple. CN is the fifth largest railroad in North America and the only one that operates coast to coast. Merger with the Illinois Central and an agreement with Kansas City Southern has given it a North American presence with lines reaching all the way to Mexico.
In 1996, his American peers named Tellier Railroader of the Year. Is CN a good investment? What do you think?
There are many other CEOs with superb track records of building up thriving companies or turning around ailing ones. In the U.S. the late Roberto Goizueta comes to mind. In 1980 Goizueta was hired to rebuild the flagging Coca-Cola Company. He refocused the company, divested it of ancillary operations, and recommitted the company to protection and enhancement of shareholder value. Warren Buffett was impressed. He bought a sizeable stake in the company. Goizueta was honored by the Emory Business School of Atlanta, Georgia in 1994 when it changed its named to the Roberto C. Goizueta Business School of Emory University. Mr. Goizueta passed away in 1997.
Michael Eisner has done a superb job in breathing new life into the Disney Corporation. He revived the company's commitment to superior animation and expanded its scope with the creation of Touchstone Pictures. Disney, not surprisingly, is another company that Warren Buffett has an interest in.
Here in Canada, the Globe & Mail recently did a profile on John Anderson, CEO of Epic Data International Inc.. Since 1997 Anderson has been making over the Richmond, B.C. company with sales up 55% this year. Pretax profit has climbed to $8.3 million from a loss of $2.3 million in 1997.
Mr. Anderson is not as well known as some of the others mentioned in this article, but he is on his sixth turnaround job now. He quadrupled the sales of Norsat International in four years. In less than a year he took B.C. Research Inc. from a loss to its first profit in five years. I include Mr. Anderson here, not only because of his track record, but because he sums up perfectly, if not exactly eloquently, the essence of a superior CEO.
"I have a Midas touch with companies," Anderson told the Globe & Mail. ""I can turn shit into gold. It's that simple."
Magazine Write-up: The November issue of Profit Magazine has an article called "Surf-it-yourself Investing" which mentions yours truly and this website extensively. Described as The Magazine for Canadian Entrepreneurs, it is particularly useful for those who own or are contemplating buying their own business. One regular feature of interest to investors is the Profit 100, which looks at the fastest growing businesses in Canada. Check it out.
The Pundit Report:: Have you checked out The Pundit Report? This new item features continually updated overviews of what various Canadian, American and International commentators are saying about the economy and investing. I add to this intra-week so you may want to check it regularly for updates. Of course, if any of the pundits we mention interest you, there are links to their webpages so you can subscribe to their newsletters or check their views online and get the complete picture.
My apologies to those of you who checked The Pundit Report earlier this week and were confused by my summary of Brent Woyat's report from Canaccord Capital. I had written "Woyat reports that after two years of slumping prices, the situation is now changing." That should have read "slumping lumber prices", a rather significant difference. I changed it after I noticed it on Wednesday.
Video Store: We've added an online Video Store to complement these pages. The movies selected are supposed to have some sort of connection to the topic, but honestly, how many movies do you know about investing, let alone investing in Canada? So I am being creative and finding excuses to just list movies I've seen and liked. Gone With the Wind, for example, is about a woman who invests in the lumber business after the Civil War. Speaking of which, we watched it last night and if you haven't seen it, please do. It is a classic.
Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions. The author holds interests in a number of the funds mentioned in this article.