Management: the good, the bad and stock price
Management actions, policies, missteps and inaction saw United Continental Holdings, the parent company of United Airline lose more than $1 Billion of share holders wealth on April 11th because of mistreating a paying customer. The CEO made a half-assed apology before coming back with a “heart felt” real apology after being roasted by the general public, regulators and legislators. Was all this necessary?
In discussing management I like to evaluate aspects that can affect the effectiveness and efficiency of corporate managers and director and how these may affect the stock performance. It’s incumbent upon investors to understand that there are situations that are unique to the corporate leadership of their portfolio companies that affect the culture, product, the balance sheet, and as such, affect how the company stock performs. Were you by any chance an investor at American Apparel? How many sexual harassment lawsuits were filed against the company and its mercurial founder? Talking of loose lips, in 2013 lululemon co-founder goes on TV and blames his company product defects on women, his core market. Were you a shareholder then? Well the share price was $80 and it just got back to that price level in Aug 2016.
Management plays a great role in the day to day running of the company: the making of the product, the selling of the product, interacting with the customers, investors and the general public. As the figureheads, CEOs play a key role in these demanding tasks. Qualifications determine who gets to be in management but the question now is what qualifications do and do not make for a good manager. Does a founder qualify to be part of management by virtue of having started the ball rolling. In the wake of Apple near death and then miraculous resurrection by Jobs, we all now ascribe to a new norm: found a company, run it. We can bring on some adult supervision but a founder is now given more slack than was the case 20 or 30 years ago. The Passion and vision founders, who are mostly outliers, bring is incomprehensible to traditionally trained managers. The success of companies like Nike under founder Knight or Under armour under Plank demonstrate that even with incumbents in a field, an outlier can make their mark, redefine the field and leave us in wonderment. What drives a young Knight to think he can take on Adidas, a global power house at that, from the back of his pickup truck. What galls must Plank have to take on Nike and its universal omnipotence from the dorms and locker-rooms of a Maryland college? Founder DNA: CREATIVITY, INGENUITY, PERSISTENCE, DETERMINATION, DON’T HAVE A QUIT TIME.
Nike has a market cap of $91Bil as of June 2016 while Under Armour has a market cap of $24Bil as of the same date. Where does New Balance fall in this equation even though it’s been making athletic shoes since the 70s but founded in 1906 on shoe culture. The founder ingredients; the vision, the heart, the passion, can make for a great company and its great to see Silicon Valley finally embraced this idea rather than blindly push out founders. It’s this same oomph that saw Howard Schultz return to the helm at Starbucks, Dorsey running two public companies and Zuckerberg killing it at Facebook.
Ownership and Control
So you own a few shares in a public company. You are in the ownership business. You belong. In the owners class. That’s great and we should all aspire and even own stocks. One stock, one vote and you determine the management and the board; hire for performance, fire for lack of. Or so it should be. There is this little company called Viacom. Its been in the news for a while now. Owns fading franchises like MTV, Comedy Central, Nickelodeon, Paramount Pictures among others. The news part, big news, if one had the galls they would make a movie of it. Succession wars, mistresses, company control, dual class stock ownership. The lead is the elderly Mr. Redstone who through National Amusements controls like 80% of the company. Law suits and media drama aside share holders care about wealth creation. Within the last 5 years Viacom has returned negative 15% while the S&P has risen 88%. Oh apples to apples CBS is up 131% in the same time period. They used to be brothers! They have to pay their departing former CEO $70 Mil to skip town.
Sometimes it’s a great thing to have a major investor holding a big stake since their fortunes are tightly linked to the performance of the asset. If Buffett owns something, I want to own it too. But in this case it has not worked out and it has drawn on too long. The second largest owner being Gamco investors and Mr. Gabelli could have done more from the inside and apply pressure from the outside. But they are passive investors unlike the loud mouthed activist investors, Right. That why mutual funds have under performed for way too long. T. Rowe Price just got into the legal business, suing Valeant for fraud. That’s right. Large institutional investors should throw their weight around more and maybe the poor Viacom owners would have had some kind of resolution sooner. In all your portfolio companies understand the ownership structure. JUST SAYING.
Frenemies we are
Oh they were mortal enemies, bitter rivals but then there was pussyfooting and a public kiss: Gates and Jobs together at last. In 1997 when Apple really needed a lifeline Microsoft stepped up and made an investment. It must not have been an easy decision on the side of Apple and more so on Jobs but the company needed help and by then management and board had come to the conclusion that Jobs was the only person right for Apple after all.
In the corporate world situations do come up where it’s sink or swim. The problem may be the product, market, management or any of the million other possibilities. Solutions are never many or easy. Groupon fire Mason (founder), is that the end of the problems or the beginning of a long cleanup process. Others may opt for a quick fire sale or bankruptcy. As an equity investor in a clearly turn around company should you bail out or hang on in what is clearly a turbulent roller coaster ride. What is the best course of action and how can you protect your wealth. No one could have predicted Apple would come out from the depth and be one of the most valuable and profitable company in the world. And at the same time nobody could have predicted Circuit City would spectacularly implode.
Of roadblocks, natural barriers and self inflicted injuries
We are captivated by the so called share economy, more so by the idea that we can participate at our own pace whether it’s when to drive for uber or if to open our homes to strangers. But big questions remain. Can anyone make a living out of the share economy, how about encroaching on locals like cab drivers and the relationships they have with the city, hotels vs your neighbors’ couch, local laws, tax issues, law enforcement, security.
As an investor how does management handle obstacles or can ineptitude cause the demise of a great company. How does a BP recover from a major calamity or a Target from hacking. Ever heard of heartland payment systems, were you an investor when its security was breached. It’s a new world but same old risks and uncertainties; things a savvy investor should be aware of. What can hold your investments back. Are the lights RED, YELLOW or GREEN and what possible obstacles and distractions lie ahead and around the corner.
A very young and fledgling facebook had an interesting approach to ensure its survival and growth. It got investments from among others Microsoft, Yuli Milner in Russia and Li Ka-shing of Hong Kong: medieval ties that bind. In the Biopharmaceutical sector small companies find themselves in the precarious position where they need funding to do research but also need to protect their intellectual property. As a public company how long are investors gonna fund and wait for the major breakthrough. In such situations some companies form partnerships with bigger established companies to help share the risks, fund the projects and share the spoils. The big company gets a foot and an eye on the next disruptor and just possibly first dibs on an acquisition of the technology, the drug or the company.
How do partnerships work in the companies you invest in? Are management attuned to the advantages and pitfalls of such tie ins.
Vision, myopia, bravado and stupidity.
Which one is it. Yahoo downs takeover bids from Microsoft, facebook from Yahoo, Groupon from Google. Is your investment in a young company gonna turn out to be betting on a minnow or a great white. Groupon management and board thought they had the growth stats to back their orka ego, turns out their stats were fudgy. Their business model was unproven. Their responsibility at that time, knowing what the world did not yet know should have been to take that science experiment and prove it under Google. In 2016 its market cap is $3.5Bil and still experimenting. How does $6Bil 6 years ago sound now.
I know it’s an intricate dance, after all facebook is doing great on its own while we buried Myspace (acquired by the old News corp.) ages ago.
Savagery, bloodletting and survival.
It’s a new dawn, a new age, the information age. The battle cries fill the air and you can smell the gunpowder. In the one corner is an upstart called Netscape and on the other is the indomitable Microsoft. The battle of the ages: the browser war. Microsoft had to win and it had influence over PC makers. It had to win. Court cases, antitrust issues, Congress, it had to win.
Those are decisions made at the highest levels and whether its product defect, competition, or environmental concerns, management and boards weigh on and calculate the risk reward ratio and take action. Whatever the debate was at BP and its partners, costs or negligence, similar discussions in the C suite offer hard lessons on the impact of management decisions on lives, livelihoods, security and shareholder wealth.
Of optics and numskulls
Most investors are aware of 5,000% drug price hike controversies emanating from one Martin Shkreli and Turing pharmaceutical. We remember his smugness and arrogance at a congressional hearing. Remember? The ensuing political debate and the famous tweet from presidential candidate Mrs Hillary Clinton. Remember? Biotech companies lost value through summer 2016 and just when you thought it was safe to get back in Mylan happens. To the Mylan management and board. Are you trying to sabotage shareholders wealth or are you that tone deaf (in case you didn’t hear about it Mylan makes Epipen allergy treatment and recently raised the price by about 400%).
You got it, media furor, congressional hearings, CEO is the daughter of A US senator, did they need all this? The stock fell of course and the genius solution, make a generic version. Perfect. Their only BRANDED PRODUCT NOW RUSHED TO GENERIC.
You may choke that to the pharmaceutical industry and our broken healthcare industry. Well do you remember Mr. Toyoda apologizing (2010) to congress and the American people for product defects at Toyota? How about the Takada airbag mess. Then how can we handle VW and the diesel car deceptions. Big fines, recalls, brand erosion. Don’t people learn from others’ mistakes or would we rather be on TV saying “I hope people learn from me”
Training can go a long way in developing a culture, work ethics and skills necessary to run a company. Industrial companies like GE and consumer facing companies like McDonalds are legendary in their training and human resource development. Due to their unique circumstances such companies undertake the task of developing the next generation of leaders and this has worked out well for them. A testament to such a culture is the fact that James Skinner, despite not graduating college, rose from a restaurant manager trainee to the CEO position at McDonalds. GE gave us Jeff Immelt, its current CEO, James McNerney the current CEO of Boeing, Robert Nardelli, formerly CEO at Home Depot, David Cote CEO of Honeywell among others.
In the early 2000s McDonalds was not doing well and there needed to be some leadership changes. The one person who had been overlooked in a succession, Jim Cantalupo was asked to come to the rescue and his turn around efforts were bearing fruit but within fifteen months tragedy struck and Mr. Cantalupo died. The Board was quick to pick Mr. Charlie Bell as a successor but within nine months tragedy struck again. The Board picked the next guy in line (Jim Skinner) and McDonalds went on despite great and devastating tragedies.
Most of us are sports fans, some more rabid than others but the one fact we all know is that an athlete can get hurt and that may translate into a lost season or the start of a long rebuilding process. Great teams and great management prepare for such eventualities and change should be seamless. The story of Tom Brady is well told and known to NFL fans but here is a guy who was drafted in the sixth round number 199 overall but stepped up in his second year when a chance presented itself and he has been a starter ever since. Just a reminder he has won four super bowls in six tries. Players come and go in New England but the coach and the QB are the constant, making for a formidable duo. I’ll give the ownership some point too but ….
Boards and management should foster environments where growth and development is nurtured rather than create cesspools of intrigue, infighting, and sabotage. Carefully research the management and board of any company you invest in: their background, companies they came from, any drama in their personal lives, any hints of infighting spilling into the media (board spying at HP). Anyone who raises their hand to serve in a high level position should stand the heat and scrutiny that comes with the office.
We live in a democracy and one of the tenets of our democracy is accountability in the sense of free elections, term limits and three branches of government. In corporate governance a company should have clear strategies in place for all to be held accountable. For publicly traded companies management should be accountable to its stakeholders: shareholders, employees, the board of directors, the government, the general public. In some situations there are breakdowns in accountability. When a CEO is also the Chairman and president of a company sometimes such power is misused. Take the case of Tyco International where the CEO could throw lavish parties and spend investor money without anyone batting an eye. Where is the board, where are the other top managers, how about whistle blowing. To an investor a great management should deliver on shareholder wealth, after all that is why you employed them in the first place. How effective is the management, what is the return on equity, return on assets since the current management took over: accountability.
Clubby, sycophants and fraternity
How long should one serve as the CEO, Chair and/or President of a publicly traded company? How long should one be a member of the board of a publicly traded company? While there are benefits to long stints at such positions the down side to comfort and familiarity is complacency. A clubby board can overlook infractions or becomes subordinate to management. Even though GE has new blood on the board, Mr. Immelt is chair and CEO since 2001; Andrea Jung has been on the board since 1998 and Robert Lane since 2005. During this time GE has gone through multiple turnaround efforts while shareholders get nothing in real returns. To its credit, in March 2016, GE implemented a 15 years term limit on a board seat. At that time Douglas Warner III, who served 24 years and James Cash, who served 19 years opted not to run for re-election while Mr. Robert Swieringa retired after 14 years.
Sometimes you have a charismatic leader who gets it right and delivers. Other times you have a smooth salesman who gets it right. Yet still other times you get a megalomaniac, a mad man who equally delivers. Investors and employees can put up with these personalities as long as products are great and successful, the stock price is going up, and the company is growing. In the event that such forces of nature start to undermine their company or fail to deliver, the board, investors and employees may be at a loss for words and action, which greatly affects the company, the culture and investor wealth. No one is entitled to such power hence the need to have greater corporate governance practices in place.
There are multiple accounts of heated debates and disparaging remarks at Apple during Steve Jobs reign. In such instances employees can be challenged or intimidated, bullied or inspired. There are incredible war stories in every company and many wounds to lick if you happen to report to a temperamental …… Not too long ago it was fashionable to be a brute in the work force. In the long run though such an environment can become toxic and counterproductive to a point where all get to bow to a naked king, not out of modesty but sheer terror. You tell him! no no no you tell him! But on and on he marches; dangling, dangling.
Jail cells and ethical lapses
We do remember the madness and the incongruence of the Martha Stewart saga. Toss in Samuel Waksal, then public companies Martha Stewart Living Omnimedia Inc and Imclone Systems, FDA decisions, corporate management, board seats, insider trading, making false statements, and you fail to understand just how humans think, process and act. For people who knew better, jail time and the accompanying humiliation was just and should serve as a deterrent to the mighty and powerful.
Although personal mis-actions and misjudgments may not be entirely mitigated, investors should be aware of the risks involved. Whether it’s a spokesperson like Jared fogle tarnishing the Subway brand, Martha Stuart getting herself in trouble and eroding shareholders wealth or employees sabotaging a company by contaminating food (Taco Bell), anything can happen. Such headline risks can also be an opportunity for savvy investors to get in at the bottom. Although it may sound crass when a stock is beat up by bad news the only way could be up. Sometimes investors bail out and wait for the worst but the worst is not often as bad as anticipated.
Compensation, instant wealth and value
Most of us rail against exorbitant compensation plans for the top corporate chieftains and rightfully so. In his testimony the former CEO of Tyco talked about being payed over $100Mil in a year and this is hard for a regular Joe Mainstreet to comprehend. That may have been those times but in June 2016 the SEC raised questions with Bank Of America about its COO compensation of $15.5 Mil while the other executives averaged $10 Mil.
Did Rob Johnson deserve $60 Mil at J C Penny in about 2 years. Did Robert Nardelli deserve to pocket $200 mil upon his Home Depot exit.
Yes there is the compensation committee, supervisory committee or whatever they may call it. Yes there is a shareholder vote on compensation (procedural and opaque). Yes there is public disclosure through the SEC. There still remain grey areas on how skillful one negotiates for compensation, metrics used to reward corporate chieftains and the general trajectory of corporate compensation. Folks, Jamie Dimon and Michael Eisner are billionaires having served as CEO in established companies for long periods of time. Unlike Meg Whitman who became a billionaire after taking the reins at a young tech company called Ebay, untold wealth has been amassed by some managers in some archaic sectors. The rising tide in corporate compensation has raised compensation and expected compensations in all sectors. Time to tame the dragon!
Boards should not reward potential but real results. Boards should not compensate anyone who jumps ship from another company to join their company by accelerating unvested options from a previous employer. Unvested options are not guaranteed pay. If someone chooses to risk unvested options to join another company that is a risk they should bear on their own and it should not weigh in any way to prospective pay in a new company.
You got jacked
Thieves, robbers, cheats and miscreants are always gonna exist in corporate America, that’s just a fact of life. At the time of an interview it’s near impossible to peer into the soul of a candidate and check out any recessive negative traits. These traits surface with time. Look at Enron and Worldcom. Management were actively involved in fudging numbers, creative accounting, seducing the media and charming their employees and shareholders. These criminals were actively dumping their stakes while touting the “great companies” they run. As an investor have a working knowledge of numbers, mergers and acquisitions. Question what is going on in the sector and the economy.
Oh pirates, jackals and plunderers
Sometime in 2013 I watched an interview where Hain Celestial CEO Mr. Irwin Simon recounted his experience with activist Carl Icahn. Mr. Icahn had called to inform the CEO that he was an investor. Normally when activist make that call, management, high on power, either disregard or fight back. Mr. Simon talked about how consultants and lawyers advised fighting, poison pills and such but he worked with Icahn and in about three years the stock had gone up three times. Win for all investors. Sometimes a pow- wow, over the poison of choice, I’d go with some hard drug like merlot or even a Corona but that’s just me. Three hours in, everyone will be falling over laughing, singing kumbaya and hugging it out. Three days later with papers signed and the customary smoke over the chimney we would have peace. The alternative is long drawn out proxy fights and court cases that detract from the core business.
While activists may be criticized for short-term outlook anyone who sees value and are willing to put their money in, at the very least deserve the attention of the management and the board since its in the best interest of everyone to increase shareholder value. Activists helped push Yahoo to take some action and eventually sell itself and pushed Ebay to spin out Paypal. Sometimes pushing management out the door and bringing in new board members reinvigorates the C suite and juices up demoralized employees.
As investor, and depending on the tract history of the activist, we can all appreciate the power of the steel toed boots kicking ass.
Activism or whatever term it will go by in its next iteration, corporate raider? Remember those times, stripping assets, selling them for a pretty penny and burying the bones in the corporate cemetery? Corporations are people after all. I hear crimson is the new blue. Opportunism will always be with us and someone will always benefit. Management and the board have a fiduciary duty and their actions or inactions should not lay the red carpet for invaders. Time is not new. It may have been corporate raiders at a different time, the modus operandi now” bringing efficiencies” or injecting healthy fear into management whatever the case management should be active, engaged and open to new ideas.
Out of left field
The year is 2008 and oil prices are at all time high the economy is cooling off before the eminent collapse. Natural gas prices are declining. We are debating fracking and horizontal drilling. We are electing a democrat to the highest office in the land. The EPA is becoming active. North Dakota is shipping oil by rail. Oil supplies rise. Natural gas supplies rise. Oil prices fall.
Throughout all this you run a coal company. You can’t read the tea leaves. Your sector gets clobbered and you didn’t see it coming.
Contemporary issues and the personal
Salesforce and the leadership of Benioff puts society at the forefront of everything they do. He is thus quoted “The business of doing business is to improve the state of the world.” Should management care and pursue social issues, injustices, oppression, and discrimination. What about political contributions and political discourse? Can corporate America help champion campaign reforms or let citizens united flood the election cycles with unaccounted money.
Cook of Apple has emerged a hero for corporate leadership in LGBTQ rights advocacy and Apple is still a great investment. Do the personal and the corporate conflate or conflict?
There are countless situations that can arise in corporate America stemming from the complexity of the humans who run these companies. The ACTIVE role an investor should play is being informed, being current, being nimble, being diversified and being strong enough to take one on the chin every now and then. Di d you know Apple could be fined $14 Billion by the EU for back taxes, what does that mean for all those corporate inversions, Ireland and taxes.