Most Valuable CEOs: The Best, The Worst, and How to Improve Your Ranking
November 21 2011 by Drew Morris And Michael Burdi
Click here to see a slideshow of the Top 10 Most Valuable CEOs
Click here to see a full list of companies and their respective rankings
Click here to read Editor-in-Chief JP Donlon’s editor’s note about this year’s top CEOs
Click here to see the methodology behind the ranking
A Look at Some of the Best and Worst Companies
Every year, we profile companies in the top and bottom ranks that we haven’t written about previously to provide a fresh set of management insights. A few notes:
- The write-ups reflect company events and performance up until June 30, 2011. Therefore, incidents such as Steve Jobs stepping down as Apple’s CEO and News Corp.’s hacking scandal were not included.
- There’s always the question of whether a CEO who produces blockbuster results is good or just lucky. The three profiled wealth creators are good, without question. And they all seemed to have a secret sauce¬—what we’ll call a prosperity design: highly specific and thought-through ways that they harnessed to create uncommon success. For the wealth destroyers, the plan seemed mainly to be, “Let’s buy another company.”
Three Top Wealth Creators…
|It’s unavoidable. Despite the “dependence-on-Steve-Jobs” risk element in our scoring methodology, Apple still blew the doors off in terms of wealth creation. And there is a lot to admire—in the main, intent and ability. Apple is all about creating “hit records”—blockbuster products and services, on purpose. They want to. They’re serious. They’re good at it. Because they’ve built the ability to create hit records, from perceiving nascent/obvious-in-retrospect market needs through designing and delivering products and services matched to those needs, and that excite. They have, well, flair. Apple’s success is built on design: of their offerings, of the businesses they’re in (the iTunes and app-store ecosystems) and of the way they shape, hone and control the offerings that get out the door—thus managing their brand. There’s little question that Steve Jobs is a unique talent. And one of the ways in which he’s applied that talent is creating an organization design that may well be able to replicate Apple’s performance to date even now that he’s no longer at its creative heart, or wooing its fans.|
David J. Lesar
|This oil-field services company is dead serious about expanding and enhancing their capabilities and the breadth of situations in which they can help their customers make more money. From there, it’s a matter of figuring out how to do that.
They have developed integrated-solution approaches, combining their proprietary workflows, software tools and equipment, to maximize the amount of oil/gas recovered. A few of these: sophisticated oil/gas-reservoir profiling software; technology for drilling horizontally and even breaking into a reservoir from the bottom, where necessary; high-performance drill-bit-steering systems, with integrated sensors driving drilling-rig information systems.
Halliburton’s total-solution approach makes it hard for competitors to intervene with low-priced, piecemeal offerings. Moreover, the way that Halliburton has worked to enable its customers has created deep, lasting relationships.
Together, Halliburton’s unique capabilities and breadth of services present a compelling value proposition to customers, and an obvious competitive advantage. All because Halliburton wanted to create them, and did.
|Linear focuses on designing and manufacturing high-performance, long-lasting analog semiconductor chips, like amplifiers, voltage regulators and data converters, some of which are radiation hardened. They are used in telecommunications, automotive, industrial, military and aerospace applications.
Linear’s wealth-creation ranking stems from astute decisions about where to play in the semiconductor industry and from recognizing the importance of retaining its hard-to-come-by design talent. Linear will play where its chips comprise only a small part of total end-product price and are chosen based on performance, rather than price. Its where-to-play decisions also include assessing whether a chip it spends considerable resources to design will evolve rapidly (necessitating redesign) or will require state-of-the-art (expensive) fabrication lines.
Finally, Linear only competes where it can earn a strong return on investment. That said, its tendency not to bend on price does at times cause the loss of a promising high-volume opportunity, or a relationship that can lead to one.
|Vulcan Materials Company
Donald M. James
|At least some of Vulcan’s placement in the rankings comes from being unlucky. The company provides sand, gravel, crushed stone, cement and asphalt used in commercial buildings and in road construction. Their construction-industry exposure was the major cause of revenue dropping by 30 percent over the past three years. As if that precipice weren’t steep enough, they overpaid (with borrowed money) for a large acquisition at the top of the market in 2007, and have been burdened with $530 million in interest expense compared with $382 million in operating income (the interest expense is not in the latter number) between 2008 and 2010.
In 2006, it seemed as though the company had the balance-sheet capacity to grow by making a sizeable acquisition. The questions in such situations are, “Should we?” Acquiring is one of the highest-risk ways to grow. “What if we’re wrong? If our world experiences a black-swan event, can we survive? What’s the upside—the chances that the acquisition will be a big win? How big? And finally, is this really in the shareholders’ best interest?”
|There may be no better example of a CEO displaying a total lack of responsibility to other shareholders than Rupert Murdoch. His News Corp.’s governance issues are legion: a spineless board, nepotism, and a dual-tier stock structure (that, in fairness, is also used by a number of family-controlled public companies). In a recent Fortune interview, the Corporate Library’s founder, Nell Minow, was asked why her company had awarded News Corp. an F grade in governance for the past six years. Her reply: “Only because there is no lower grade.”
This lack of responsibility has of late manifested itself in wealth-destroying acquisitions (among them, Dow Jones, mainly just because Murdoch had long wanted to own it), and News Corp’s abject failure to manage its credibility: “Fox News: the only fair and balanced network.” The inability of other shareholders to influence the company’s governance and direction has given rise to the term, the Murdoch discount. On June 30, 2011, before the “News of the World” scandal came to light, that discount, according to Reuters Breakingviews’ calculator, was 21 percent, or $12,352,000,000. The outside shareholders’ portion of that, 88 percent, comes to $10,869,760,000. If a CEO took almost eleven billion from them by any other means, what would a responsible board do?
|Monster has positioned itself as a general-focus player in Internet recruiting. But many job seekers don’t necessarily want a general-focus job board like Monster.com. For many, there’s too much chaff to sift through. So Monster’s value proposition (a wide range of jobs) is not particularly compelling—those with specialized skills largely focus on similarly specialized job boards. And employers seeking people with those skills “go where the fish are,” especially when recruiting money isn’t growing on trees.
There’s also an element of bad luck in Monster’s results; the tanking of the job market over the past few years.
But it seems that Monster could have done a better job of managing its portfolio of businesses. Rather than spending $225 million taking out a competitor, HotJobs, thereby gaining $19 million in 2010 revenue while operating income decreased another $34 million, perhaps they could have done something better with it, like acquiring a few niche job sites, or buying into an altogether better business. After all, the upside potential of running recruiting ads and employer searches is inherently limited, both in terms of volume and in revenue per transaction. Monster might have found something with better leverage and ability to scale had they used a wide-angle lens to look.
How to Move Up in the Rankings
In publishing this list, Chief Executive aims to show CEOs both where they stand with respect to their peers (awareness being the mother of improvement) and to make clear how to go about improving one’s standing. Improving will require several actions that the company’s CEO, division heads and general managers can take:
At the corporate level:
- Use EM to measure wealth-creation throughout the company.
- Manage your portfolio of businesses from a wealth-creation perspective. This includes opportunity sensing—entering lucrative or fast-growing businesses as well as putting businesses making sub-par contributions into other hands or shuttering them. Set the contribution hurdle rate to maximize economic-value creation.
- Ensure that the company’s capital structure is right. This affects the capital charge and invested capital. Equity is more expensive than debt, but too much debt can kill a company.
- Avoid overpaying for acquisitions or buying back stock at its peaks.
At the business unit level:
- The general managers of businesses need to find the best things they can do to boost operating results. (See “Leading Your Business to Maximum Results,” CE, January/February 2008.)
At all levels:
- As did the leading Wealth Creators, put together a prosperity design for your company. How, exactly, will you achieve uncommon success? How will you improve: customers’ feelings about your company and its offerings, your value propositions, the promises your brands represent, etc.? How you will get all you can out of your assets, include your intangible assets? (For more, see, “The Economic Stimulus Package Inside Every Business” CE, January/February 2009 (online), and “Do Intangibles Matter?,” CE, July/August 2008).
- Finally, manage internal and external risks across the company and its aggregate risk-reward profile by taking a wide-angle lens to what could happen.
Drew Morris is the founder and CEO of Great Numbers! The company helps executives find the various dimensions of the upside in their businesses and mold it into a prosperity design — a blueprint for delivering that upside. He has no stake in any of the companies mentioned.
Michael Burdi is senior analyst for Applied Finance Group, Ltd. (AFG), a Chicago-based independent equity research advisory firm specializing in performance and valuation measurement using Economic Margin.
Disclaimer:AFG, its owners, employees and/or customers may have positions in the securities listed in this article. The information provided is based on material AFG believes to e accurate and reliable, however its accuracy and completeness, and conclusions derived there from, are not guaranteed.
Chris Austin, senior portfolio consultant at AFG, also contributed to this article.