What Investors Look for in You as the Manager

Thursday, January 16, 2003

The Motley Fool Staff, Motley Fool, http://www.fool.com/research/2001/foolsden010116.htm

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 TMF Staff
January 16, 2001

When you buy a stock, there are probably all sorts of factors that go into your decision. You look at the balance sheet and the income statement, the industry in which it operates, and the competitive advantages of its products or services. You might even visit the company's website, study its advertising and marketing strategy, or delve deep into the company's annual reports and Securities and Exchange Commission (SEC) filings. 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.
-- Jerry Thomas, TMF Cheeze

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

[Here's a history lesson in the making...]
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 some 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.
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- 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.
-- Phil Weiss, TMF Grape

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.
-- Zeke Ashton, TMF Centaur

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