The Power of People

I’ve decided to ignore the noise of the stock market and every second person who believes they are an expert on inflation and interest rates. Instead, I will walk away from a such debate and discuss one of the four “Ps” in our approach to identify and invest in high-quality companies in our global universe. Which by the way is 51,607 companies if you use the stock screener from simplywall.st (an Australian fintech business from Sydney).

Before, we embark discussing the first P – People, I will give you a quick snapshot of the three other “Ps” we use in our analysis: Product, Potential and Profitability.

People

The “People” aspect is perhaps the most qualitative of the four “Ps” and I would argue that “P” for “People” is the most important of the four “Ps”. A company can have the best product or service, a significant market opportunity potentially running into billions, and able to generate high margins and returns.  Although, if the “jockey” is mediocre, it’s most likely your “horse” is going to finish last, if they finish the race at all.

For example, the global equities portfolio is invested in high-quality companies such as Lowes, which all else being equal, they should underperform the market leader Home Depot. But what happened to Home Depot?

We should ask the same question about companies such as General Electric, Intel, and IBM. All three companies have long pedigrees and bastions of corporate US.

However, in this article I will focus on General Electric story and what happened at Home Depot will become clearer when we place Robert Nardelli under the spotlight.

General Electric

Looking back to the year 2000 – it was about one year before Jack Welch retired as CEO of General Electric. After two decades, at the helm at one of the largest industrials / financial services companies in the US. There were four gentlemen in the running to take over from Jack: David Cote, Jeff Immelt, Jim McNerney and Robert Nardelli.David CoteBeginning with David Cote, he made it on a list of potential successors to then CEO Jack Welch but was cut relatively early in the process. Jack dismissed him and helped him land a job at TRW Automotive Holdings Corp, where David became CEO in 2001. After just a year, he joined Honeywell, a conglomerate that General Electric attempted to acquire but was blocked by European regulators. TRW Automotive Holdings Corp was then acquired by Northrop Grumman in 2002.

When David Cote arrived at Honeywell, the company was struggling. Revenue was down in FY02, and the company incurred a loss. At the time David departed (about fifteen years later), the Compound annual growth rate (CAGR) in revenue was 4% and the company achieved an Earnings before interest and taxes (EBIT) margin of 18% in FY18.

He served as chairman and CEO of Honeywell from July 2002 to March 2017. He was executive chairman of the board at Honeywell until April 23, 2018. During his tenure at Honeywell, the CAGR in the stock price was 13%, compared to 7% for the S&P 500. Today Dave is the executive chairman of Vertiv. A loss to GE, one can rightly argues and a major coup for Honeywell.Jim McNerneyNumber two in the running for the top job was Jim McNerney. Jim was hired by 3M in 2001. He stayed on until 2005. During this period, the Compound annual growth rate (CAGR) in 3M’s stock price was 8%, against the S&P500’s 2%. One could argue his tenure at 3M was too short to evaluate whether he made a difference. When he joined 3M, the company had revenue of U$16bn – it grew to U$21bn at the time he left to join Boeing.

Boeing a U$55bn company (revenue), in 2005 with a net profit of U$2.6bn and the stock price at around the U$60 to U$65 mark. Jim was the first CEO appointed at Boeing without any Aviation background. During his tenure, the decision was made to upgrade the 737 series to 737 MAX instead of developing a new model.

The challenges facing Boeing with the Dreamliner also occurred under the leadership of Jim McNermey – as described by an anonymous former Boeing executive: “The sense I always got from him in meetings is that it could have been any business…If we’d been making cameras or autos or doing bond trading, it would have all been the same to him. The net effect is distancing from the people who come to work there every day, who bring their hearts and souls to it and want to make it more than a job.”

The rest is history, so to speak. A headline in the Forbes magazine stated “Boeing Will Pay High Price For McNerney's Mistake Of Treating Aviation Like It Was Any Other Industry”. Whether Jim resigned or was pushed, is irrelevant – by the time Dennis Muilenburg joined Boeing as CEO, the damage was already inflicted on Boeing.

I find it amazing the chairman of Boeing during the tenure of Dennis Muilenberg and now CEO, David Calhoun, is also a General Electric alumnus. He worked at General Electric for 26 years and vice chairman and member of the board in 2005. David was a non-executive director of Boeing from 2009 onwards.Robert NardelliThe third person in the running for top spot at General Electric is Robert Nardelli. A news article about the resignation of Robert Nardelli at Home Depot by Knowledge at Wharton stated that:“After years of a declining stock price, Home Depot announced the resignation of CEO Robert Nardelli on January 3. Wharton faculty members and other experts say Nardelli, a talented former executive at General Electric who came within a hair's breadth of replacing Jack Welch as head of the giant conglomerate, brought the wrong toolbox to the job after he was recruited for Home Depot's top spot in December 2000. With strategic missteps, an outsized compensation contract and a knack for alienating employees and shareholders, Nardelli turned out to be a star-crossed leader”.

And the winner is… Jeff Immelt

Finally, the person who secured the top job at General Electric to replace Jack Welch was Jeff Immelt. He was CEO of General Electric from 2001 to 2017. Prior to his appointment he was CEO of General Electric’s Medical Systems division.

According to the New York Times, “On Mr. Immelt’s watch, G.E. stock plunged some 30 percent, wiping out more than $150 billion in market value and obliterating the savings of thousands of G.E. retirees. Since Mr. Immelt was pushed out in 2017, it has only gotten worse. G.E. was dropped from the Dow Jones industrial average, its stock has continued to slide, and it recently paid $200 million to settle with the Securities and Exchange Commission for misleading investors. Once a paragon of modern management excellence, G.E. became a punchline.”

The key take aways as a investors are:

• Investing in a company with corporate leadership, in which the original founder / s has long departed and not having “skin in the game”, requires a thorough analysis of the C-band executive leadership.
• Boards have an obligation to shareholders to ensure that companies are led well, and the sooner they can spot problems with leaders’ performance, the better.
• High-performing CEOs do not necessarily stand out for making great decisions all the time; rather, they stand out for being more decisive.
• Mundane as it may sound, the ability to reliably produce results is possibly the most powerful of a CEO’s behaviours – the stock market does not sit well with spikes either up or down when it comes to profitability & growth.

Written by Johan Snyman
Portfolio Manager
Oracle Investment ManagementUnsure where to go next?
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