William Dunk's 2001 Annual Report On Annual Reports
Gone With the Wind;
We all know about entrenched, gnarled leaders who hang onto their jobs until death, paralyzing infirmity, or a police escort drag them from office. On one occasion, Sewell Avery, the fellow who ruined Montgomery Ward several decades ago, was forcibly carried out of the building. Marvelous Strom Thurmond, the senior Senator from South Carolina, has become part of the furniture of our nations capitol, perhaps never to be dislodged from the halls of bombast.
Well, the Sage of Omaha is holding on, too. Indeed, in this years Berkshire Hathaway Annual Report, Warren Buffett warns us that he may be around for awhile:
Well, we suppose Buffett is sort of right. As he and Mr. Munger chew the fat in their corporate suite, they are, year-to-year, not maturing as fast as their younger contemporaries.
But, in one sense, he is dead wrong. Lately weve been retiring or firing so many CEOs, that we have been lowering, not raising, the age of the team at many companies. Buffett, in truth, knows something about this, having participated in the eradication of CEOs at Gillette and Coca Cola. Of course, he did not put any spring chickens on the roosts at these companies, so he may not know that some young turks who are still joggers are actually rising to the top at several companies.
CEO turnover is the major business story of 2000, and it is the recurring melodrama that plays out in one way or another in a host of the years annual reports. This is widely recognized. The Economist writes about Churning at the Top in its March 15, 2001 issue, noting that in February 2001 alone, 119 exited, with more than 100 departures each month since August 2000. In part, the article attributes some of the churn to the very different demands of the current business climate, observing also that the brand new CEOs have a mixed record of performance thus far in their tenures.
Of course, all this turmoil is good news for a few lucky souls. The outplacement firms are jumping up and down with joy, Challenger, Gray and Christmas in Chicago even keeping score on the rate of turnover. Restructurings, executive flipflops, and global buyouts have even generated a new species of human resource firms such as Executive Interim Management, which finds interim presidents for companies around the globe. A $10,000-a-day (per CEO) CEO Academy for recently-created chieftains will convene on the Upper East Side of Manhattan this summer to give some quick bootcamp training to the new boys on the block.
At least as pictured in the reports, most of the successions are orderly. Typically the last CEO and the new CEO are pictured together, and often write wonderful things about each other and their sanguine expectations for the company. In GEs case, two members of the ancien regime (Welch and Dammerman) and two new leaders (Immelt and Wright) smile bullets at us. Equally happy pictures are painted at Sara Lee, Alcoa, Air Products, Crawford & Company, Bristol Myers, TRW, Interpublic, and Home Depot.
Even companies not introducing a new CEO are at pains to portray a strong, happy executive team early in the reportoften, unusually, with group pictures of many managers right beside the presidents message. Dupont, which has had a few business bumps, shows all its senior leaders on page 3. Tuscarora and Radio Shack trot out their executive teams right up front. On May 30, Radio Shack shares plummeted 18% when it said earnings would fall: when troubles strike, we tend to picture the whole team. When times are very good, we may just show the boss. Hasbro discusses its experienced management team in the letter, saluting George Volanakis, now heading up International, and some others in the text. The Charles Schwab Annual Report reiterates throughout the book that its more than one person, and hails its bevy of winners, even quoting them liberally, on pages 25 to 31. In some instances, these companies are pridefully anointing recent senior recruits to the company, rather than new chief executives.
Of course, many of the reports are not focused on the infusion of new blood into their ranks, but rather, curtly underlining the bloodletting that was very much evident in 2000. At Newell Rubbermaid, former chairman William Sovey, stepping back in as a caretaker, replacing John McDonough, who was deposed in November, cheers the selection of Joseph Galli, an outsider, as the new chief. Gillette, with a Mach 3 Razor on its cover, lets its new head talk about the firings:
If you survey Texacos Report and see Chief Executive Glenn Tilton with his management team, you would never suspect that CEO Peter Bijur was unceremoniously bumped on February 4, 2001, becoming such a non-person that there is no allusion to him or his leaving. Texaco needed an interim chief, even though it is soon to disappear into Chevron. Likewise Henry Schacht, recalled to the helm of Lucent, has little to say about his hand chosen successor, also dumped during the year.
A different world and the unrelenting demands of stock market capitalism have driven the quest for new blood, whether achieved by resignation or regicide. This need has been best articulated by a great foreign leader, the semi-retired, brilliant Lee Kuan Yew. In an interview with the Asian Wall Street Journal on 23 April, he said:
If we need new managements with new thoughts and skills, annual reports are surprisingly vague about the new requirements of management and the new types of leaders that can make enterprise flourish. Heidrick and Struggles, the recruiting firm, says that its best people help their communities in ways going well beyond their roles in business:
Hilb, Rogal, and Hamiltonan insurance brokerage firm in Glenn Ellen, Virginiasays that it is looking for achievers that soar inside and outside of business, picturing managers that are supermoms, judo experts, bikers, mountain climbers, and daredevil pilots. GE brags about its Type I leaders, the managers who simultaneously make their numbers and yet live by the communitarian, learning values ostensibly worshipped by the company. All this said, annual reports are strangely silent on the new demands of leadership circa 2001.
Several companies, however, hint at the somewhat passť agenda they are bestowing on their new leaders. Even more cost control, centralized direction, and increasing consolidation are the order of the day. Sara Lee claims we are becoming more centralized to better leverage our strengths. At Air Products, we are restructuring our North American and European liquid/bulk and packaged gas businesses, taking costs out . And so it goes. By and large, companies are still in the cost-reduction mode of the last 15 years, lacking a clear path to accelerated growth. Looking backwards, these new leaders are strangely reminiscent of Messrs. Bush and Gore, both of whom trotted out very old messages during the last presidential campaign.
In spite of electricity shortages, attacks of computer viruses, and other calamities, companies are not addressing the increasing number of systems breakdowns they are encountering, either in their annual reports or, we assume, in their day-to-day operations. A wonderful exception is United Grain Growers which, as a matter of company policy, has enumerated 47 risks in its business and has laid out some of the risk management tactics that have grown out of this comprehensive review. Canadian corporations are talking more specifically about their business risks as a result of the 1994 Dey Report that urged such transparency.
In fact, mounting risk and a volatile business environment do demand a different kind of business leader. Mitchell Mumma, general partner at Intersouth Partners, a venture capital firm in the Research Triangle, is quite succinct about the agility he now looks for in his entrepreneurial leaders. Right in our private placement memorandum, we have said we are looking for the ability to adapt to unforeseen circumstances. In boxing thats called rolling with the punches.
Risk management, going well beyond the derivatives risk section that appears in company financials, will begin to appear in more and more reports in future years. In a March 2, 2001 speech, Robert Bayless, Chief Accountant in the SECs Division of Corporate Finance, said that he expects better disclosures around risk, the accuracy of revenue recognition, and the transparency of segment accounting. The lattersegment accountingwas the most important innovation in disclosure from the SEC and FASB in the last 50 years. Coming about in the late 60s and early 70s, segment disclosure has never been pushed far enough, companies not being forced to break out results at the business unit level to let investors know what is really going well or badly in operations. More insistent disclosure in these 3 areas will surely lead to better business practices in a host of companies.
As we said above, the crop of new chief executives is still being driven by yesterdays insular agendataking out costs. Very few are focused on growing revenuesthe agenda of tomorrow.
We suspect this is where investors should be focusedon companies motivated by growth. Probably this means looking at companies on the move globally. Long-term it means seeing who has their eyes on Chinas markets, since China is the only major economy relentlessly growing at a fast rate in the world today.
For instance, GE merits a semi-kudo in this regard. It had long been a laggard internationally, but now gets 40% of its revenues outside the U.S. Its Pacific Basin revenues have more than doubled from 1998 to 2000, far outstripping its growth rate in other regions. It has been shrewd about picking up cheap Japanese assets, during that nations current semi-depression. Since its disclosure practices are a bit opaque, we cannot tell, however, whether it has picked up enough steam in China. (N.B. For more appropriate disclosure, look at DuPont which gives country-by-country detail on page 68.)
Likewise, we can look at Air Products which has trebled its Asian assets, although, once again, its report fails to give adequate country-by-country detail. WalMart gives us some detail, showing its hedging activities in Hong Kong currency, as well as pointing out its 11 superstores and Sams stores in China. It has just opened a new underground store at Dalian. But with GE, Air Products, and others, we see a thrust toward Asia where the big markets lie. This is the challenge for CEOs, because they, like Willie Sutton, who always targeted the banks, must go where the money is.
Achieving global growth will not only require the risk management skills to which we have already alluded but also superior partnering skills to guide and shape the multi-faceted alliances that are the most striking organizational development in business today. Now chief executives must obtain results in a collegial way from institutions and companies they cannot command. For instance, George B. Bennett, Chairman of Health Dialog, Inc., the fastest-growing health-information company in America, attributes his companys momentum to the dexterity with which it has forged relationships with numerous companies, foundations, universities, associations, etc.:
Risk management, global trust, supply chain collaborationall these require a new breed of chief executivea sea change not apparent in the latest crop of annual reports.
If a few current annual reports teach us that we should be looking for managements with global clout, we suspect San Diegos Jack-in-the-Box best tells us what sophisticated money managers want out of managements-in-transition. Jack-in-the-Box, once the home of the burger blues, has taken to doing one of the more fun annual reports in the nation.
This year its report is dressed up as a classified dossier compiled by a competitor from Illinois named Burger Bully. Burger Bullys spy discovers that JBX is a very powerful competitor. At the end Robert Nugent, CEO and upcoming chairman at JBX, remarks:
At the end of the day, institutional investors are probably still looking for a stable team that knows where its headed and is going there. Despite this years revolving-executive door, theyd prefer to see more turnover of inventory (revenues), less turnover of management.
Footnotes on the Twentieth Century:
1. Gone With the Wind the most famous book about the Civil War and the source of endless nostalgia (see http://www.franklymydear.com/hotmedia.html). But it was this war that put the industrial North and its magnates atop the United States for better than a century, only now to be displaced by global business impresarios.
2. Its Still the Same Old Story a line from As Time Goes By forever identified with the movie Casablanca. No matter how the world changes, the old truths (the fundamental things apply as time goes by) are thought to be eternal even if the world has turned upside-down. But when you look backwards, its hard to come up with new tunes.
Companies Mentioned in this Report:
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