This Is When to Worry About Your CEO

There are a lot of things we could say about former MF Global (OTC: MFGLQ) CEO Jon Corzine. If we were to ask thousands of former MF Global customers -- who, as a group, are missing $1.2 billion after the broker's epic collapse -- most of those things probably wouldn't be fit to print on a family-friendly website like The Motley Fool.

However, there is one thing we can say for sure and don't have to censor: Jon Corzine didn't need MF Global.

As a former chairman of Goldman Sachs, a former U.S. senator, and the former New Jersey governor, Corzine had an impressive resume that could have opened any number of doors for him -- most of them plenty lucrative and not terribly challenging on a day-to-day basis. Corzine was also already a very wealthy fellow. He had enough to spend roughly $100 million financing his political ambitions and according to OpenSecrets.org, he was the third-richest senator in 2005, with a net worth that may have been as much as $250 million.

To reiterate, if Jon Corzine's path had never crossed MF Global's -- heck, if Corzine was never a CEO, chairman, or other key executive anywhere ever again -- the 64-year-old would have likely lived out the rest of his days very comfortably.

There are a lot of directions we could run with this, but what I want to focus on is what stock market investors can take away from it.

Just one metric
Back in 2009, Fool co-founder Tom Gardner wrote an article titled "How I Find Great Stocks." Right at the outset of the article, Tom wrote something that really stuck with me. He said that if he had to choose just one metric to base his investment decisions on it wouldn't be growth, price-to-earnings ratio, return on equity, or balance sheet cash. Here's what he wrote:

The metric is straightforward, easy to find (just look at a company's 14A filing), and it doesn't require any math or investing experience to interpret. You'd be amazed by how closely correlated it is with stock market success, and yet it is still overlooked by the majority of investors. You MAY have guessed it ... my metric of choice is insider ownership.

How did Corzine stack up on this metric? At the peak of his ownership, Corzine had $3 million invested in MF Global, which equated to roughly 0.24% of the company's outstanding shares. To put that in perspective, for somebody with a more modest $250,000 net worth, that ownership stake would equate to around a $3,000 investment. That's certainly enough to be bothersome if lost, but hardly the type of investment that would cause our fictional investor to be especially cautious and conservative.

But it goes even further than just the money. Beside the fact that his buddy Chris Flowers' investment fund had an investment in MF Global, Corzine didn't have any strong connections to the company. He didn't found the company, nor did his family. He didn't come up through the MF Global ranks. The futures business wasn't even what Corzine focused on when he was blazing a trail through Goldman Sachs. In other words, Corzine was simply a hired gun who had the opportunity to make some money and burnish his reputation without really putting much on the line.

Into the scrum
So how can investors use this in choosing stocks? Building on what Tom said in his 2009 article, it's a good idea for investors to evaluate who's running the company in question and what they've got on the line.

On the one hand, with a CEO who founded the company and has most of his net worth tied up in his ownership stake, there's a much higher likelihood that the decisions he or she makes will be with an eye toward outcomes that all shareholders can cheer. On the other hand, a hired-gun CEO like Corzine who doesn't have any ties to the company, or much to lose, should bring extra scrutiny from investors.

To illustrate what these two situations look like, here are three companies whose CEOs I would be more comfortable trusting.

  • Berkshire Hathaway (NYSE: BRK-B  ) . OK, perhaps this is a gimme, but we hardly want to overlook one of the greatest corporate, investing, and managerial stories of our generation. Berkshire CEO Warren Buffett not only owns 22% of the company -- which equates to a cool $42 billion -- but he's also the architect of the company that built it from a failing textile manufacturer to a powerhouse conglomerate.
  • ArcelorMittal (NYSE: MT  ) . Lakshmi Mittal owns 41% of steel giant ArcelorMittal and was the force behind building it into the world's largest steel producer. Obviously this isn't a passing fancy -- Mittal's name is on the company and he's a steel man, plain and simple. Mittal is a fantastically wealthy individual who loves to throw his money around, but his near $9 billion stake in ArcelorMittal means that he's got a lot on the line.
  • Wynn Resorts (Nasdaq: WYNN  ) . CEO Steve Wynn owns 8.1% of Wynn Resorts, which is currently worth more than $1 billion. Steve Wynn is the founder of Wynn Resorts, a longtime Las Vegas Strip developer, and like Mittal, named the company after himself. For Steve, there's a lot riding on the continued success of Wynn Resorts.

 On the flip side, I'd be more wary of the head honchos at the following companies.

  • Hewlett-Packard (NYSE: HPQ  ) . Meg Whitman's name may sound great to some given that she made a ton of money running eBay for many years. But Whitman's experience is consumer and retail -- eBay is very much a retail company and she was at companies such as Hasbro, Stride Rite, and Walt Disney prior to eBay -- so I'm not exactly sure what qualifies her to run a tech giant like HP. Whitman has no history or ties with HP and other than the stock and options she was handed for signing on with the company, she owns all of 66 shares of HP stock.
  • General Motors (NYSE: GM  ) . Perhaps GM needs a fresh perspective for a new direction. But call me a skeptic when it comes to Daniel Akerson. Akerson has executive experience -- including top executive spots at MCI, Nextel, and XO Communications -- but nothing even vaguely related to autos. He came to GM directly from the world of high finance as a managing director of The Carlyle Group. And though Virginia Business estimated his net worth at $190 million, he currently owns just $3.5 million in GM stock, or about 0.01% of the outstanding shares.

Follow along
MF Global may have already succumbed to its epic flame-out, but you can still dig in to the stocks above and determine whether their CEOs are incentivized to run their companies in a sensible, shareholder-friendly way.

To keep up with the goings-on at these companies, you can add them to your watchlist by clicking the "+" sign next to the respective tickers. Don't have a watchlist yet? Set one up for free by clicking here.

The Motley Fool owns shares of Berkshire Hathaway and ArcelorMittal. Motley Fool newsletter services have recommended buying shares of Walt Disney, Berkshire Hathaway, Hasbro, The Goldman Sachs Group, eBay, and General Motors. Motley Fool newsletter services have recommended writing puts in eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway and ArcelorMittal but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (26) | Recommend This Article (52)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2011, at 1:56 PM, tommy2kjr wrote:

    Meg could manage practically anything. While I don't agree with her politics, she's a wonderful CEO!! You don't have to be an industry expert to be able to manage a company. You have to have solid management capabilities because you have 100's of thousands of employees who have experts in those fields, and she's already completely up to speed in my opinion. So get a life. She's a great CEO!!!

  • Report this Comment On December 30, 2011, at 3:08 PM, mipakaco wrote:

    So you like WYNN because Steve Wynn owns 8% (who has no presense in Singapore, and nothing coming online for years to come), but not Las Vegas Sands, where CEO Sheldon Adelson owns around 55%, (and has a Singapore casino that produces more revenue than the entire Vegas Strip, and has TWO properties opening in 3 months on the Cotai Strip) where NOTHING else is opening in the next few years. Good call.

  • Report this Comment On December 30, 2011, at 3:10 PM, TMFTomGardner wrote:

    It was a fine defense, Tommy, until you said, "Get a life." At that point, I know you've lost all objectivity.

    It is going to take a lot to fix HP -- because what it needs is a fix to the core culture of leadership.

    I would be excited about the company IF they committed right now to making the next 3 CEOs after Meg....ALL...candidates developed internally.

    I have a lot of respect for Meg as a CEO, but she also faces a big task. To be great, she has to set up HP for 10-20 years of greatness...not just an exciting 3-5 year run.

    Remains to be seen. But, as Matt has written, I love to find the industry expert, with a large ownership stake, who is growing a small-cap into greater dominance.

    This thinking comes from seeing someone like Jeff Bezos do it...without hopping from company to company. And I'm reminded of Coach K at Duke answering a leadership question I asked him by saying, "It is all about continuity. I arrived at Duke and have never left. My players return every year. The principles are in evidence every day."

    I hope Meg can build that out at HP.

  • Report this Comment On December 30, 2011, at 3:11 PM, ibuildthings wrote:

    If only this guy was a Republican, we would see hourly news updates from the networks, and full-broadcast reviews of the losses, his political connections, and the names of every other politician he ever knew. But precious little, because of his party, will be hammered into the voting population.

  • Report this Comment On December 30, 2011, at 3:53 PM, MichaelSaeltzer wrote:

    I completely agree with Matt. For more on this, including data and commentary see:

    Berkshire Hathaway's Owner's Manual: A Discussion of Owner Related Principle 2

    at http://seekingalpha.com/user/477566/instablog

    Thanks Matt!

    michael saeltzer

  • Report this Comment On December 30, 2011, at 4:02 PM, TMFBane wrote:

    Great article, Matt! A good example of this is Steve Jobs versus John Sculley at Apple. The former -- for all his faults leading up to his ouster in 1985 -- was deeply passionate about Apple and its products. The latter -- who was brought in for his management expertise -- had the same passion for Apple products that he did for Fritos (which were produced by Pepsi, the company he came from). We, of course, know the rest of the story. When the co-founder Jobs returned, he was able to restore that passion in all that Apple did.

  • Report this Comment On December 30, 2011, at 4:16 PM, pehenia wrote:

    Kind of a weird analogy, but I think of this when I think of the fast food places I worked. If the employees (including myself) would eat there, you know it's probably okay.

    Andy

    www.mygreengear.com

  • Report this Comment On December 30, 2011, at 4:35 PM, itsagambol wrote:

    An old race track veteran once told me:

    Never bet the horse, bet the jockey

  • Report this Comment On December 30, 2011, at 8:24 PM, ejhickey wrote:

    MF Global had a deferred compensation scheme for its employees that worked something like this . most of the employees were forced to put 20% of their pay in a deferred compensation plan. the plan put the money in MF Global stock thus boosting the stock price. this plan started in 2009 when the price of the stock was about $4 a share and succeeded in boosting the price to $10 . Supposedly this plan was started when Corzine was planning to come on board . since a lot of his and other executives compensation was in the form of stock, the top management was able to profit from the employees' contributions and effectively steal their wages.

  • Report this Comment On December 30, 2011, at 10:42 PM, rocket1az wrote:

    "And though Virginia Business estimated his net worth at $190 million, he currently owns just $3.5 million in GM stock, or about 0.01% of the outstanding shares."

    (3.5/190)*100=.018=1.8%

    Thanks, I enjoyed this article. MF Global is an excellent example of what can happen if CEO's aren't invested in what they are doing.

  • Report this Comment On December 30, 2011, at 11:30 PM, BMFPitt wrote:

    @rocket1az

    You're mixing terms. .01% of outstanding shares, not of his own net worth.

  • Report this Comment On December 31, 2011, at 2:40 PM, crca99 wrote:

    Consider Heico, my lucky find from Smart Money columnist. Father and sons have done well. Company grows, multiple expands, dividends come mainly as added shares of stock. I held it because of TG advice above.

    Then consider Cemex where family grew business until they took on too much debt. Have to wonder whether board meetings were too much 'yes'ing the patriarch and bad advice.

  • Report this Comment On December 31, 2011, at 8:24 PM, TempoAllegro wrote:

    I have really come to agree insider ownership is a KEY element in choosing good investments. I was shocked to see this reference to Tom's 2009 letter - thanks Matt for this article!

    A recent choice of mine was to buy shares of MA instead of V. Mastercard has a great business model and also almost 11% insider ownership. Then a recent article on Fool (My Top CEO's of 2011 Part 2) highlighted the CEO of MA (Ajay Banga, who has been CEO since July 2010) as an excellent performer. The stock has returned 67% this past year while most other financial stocks have taken a dive. I pulled the trigger before this article, based on things I look for in a buy, but the main element was insider holdings.

    I do not believe that should be the only thing to consider. For example, I have been sweating the difference between MOS, which has high insider ownership, and SQM, which does not. Perhaps it is comparing apples and oranges here, but in the end I went with MOS and just had to decide to stick to my principles. Otherwise investing can become quite confusing, especially in this environment.

    Here was another one: ATW vs. SDRL vs. RIG or another offshore oil driller. In the end, ATW is what I went with. Hard call.

    Opinions would be welcome.

  • Report this Comment On January 01, 2012, at 1:33 AM, jmichaeljaffe wrote:

    The significance of an insider's ownership percentage alone can be terribly misleading. There is one more critical question to ask: HOW did/does the insider acquire the ownership? Is s/he acquiring shares with penny-per-share options awarded by a pliable board for lacklustre performance? Is the insider's ownership percentage so high as to prevent a challenge to an entrenched, incompetent management? Or does it just ensure a formidable exec share voting block?

    I have seen, first hand, a company awarding lavish options packages to its execs when the company had zero... ZERO revenues. I've seen a CEO awarded a work-at-home allowance of $50K a year, in addition to his company car and very comfortable office... while his company had ZERO revenues. And, there were the penny options while the stock was trading over $10 per share. Of course, insider ownership was high. Anyone who invested real money in this dog of a company, however, saw their stake become worthless.

  • Report this Comment On January 01, 2012, at 4:50 AM, bettor2win wrote:

    Articles like this is what makes me More FOOLISH. Meg Whittman ran for office a couple years back and now shes running HP? Sound familiar...CORZINE. I work in the healthcare industry, that doesnt make me qualified to run Blue Cross or Kaiser Permanente. Im a fool. Fool on.

  • Report this Comment On January 01, 2012, at 7:07 AM, skypilot2005 wrote:

    Good article, Matt.

    You wrote:

    “Back in 2009, Fool co-founder Tom Gardner wrote an article titled "How I Find Great Stocks." Right at the outset of the article, Tom wrote something that really stuck with me. He said that if he had to choose just one metric to base his investment decisions on it wouldn't be growth, price-to-earnings ratio, return on equity, or balance sheet cash. Here's what he wrote:

    The metric is straightforward, easy to find (just look at a company's 14A filing), and it doesn't require any math or investing experience to interpret. You'd be amazed by how closely correlated it is with stock market success, and yet it is still overlooked by the majority of investors. You MAY have guessed it ... my metric of choice is insider ownership.”

    Is there a website that tracks the total amount of shares insiders own in U. S. companies listed on the major exchanges? Canadian companies?

    I have some websites like Canadian Insider (http://www.canadianinsider.com/) I use to look at recent insider activity in the companies available there. It lists the date, insider name, amount of shares bought or sold, recently. The information is taken from SEDI filings. It does not list the total number of shares owned by each insider.

    At Yahoo Finance, I can access Major Direct Holders (forms 3 & 4). I assume that is the top company insiders and their holdings. This is based on the information in the Insider Roster section of the page. Finally, Insider Transactions lists the last 2 years of inside transactions. All of this is in the Ownership section of the page in the left column.

    What source(s) do you use / recommend for ascertaining current inside ownership? Something quick and accurate.

    Thank You in advance.

    Fool On

    Sky Pilot

  • Report this Comment On January 01, 2012, at 11:03 AM, RondoAZ wrote:

    Interesting point and one I've used since I was a cynical young retail stockbroker in the early/mid 70's.

    In fact, throughout my career, I've worked and lived as though I had 100% of my net worth (more importantly my personal integrity and legacy) on the line wherever I was.

    That meant that I was a driver, never let hours get in the way of achieving intended goals, and never let someone else's position get in the way of the truth and the goals, and doing the right thing the right way.

    That cost me a few jobs, both within the company (United Technologies - I went head to head with George David, who backed me, and others who didn't) and later I was given the opportunity to resign a couple of positions (SPX, Federal Signal).

    Still, it is a true and faithful metric. How much does a person have in the game? If he/she can simply walk away (monetarily, or without honor getting in the way) don't invest in them or their company.

    Honor and Integrity are far more important and a better gauge than even the money. Think Koz and Tyco, or Corzine and MF, or Madoff, or ... ad nauseum. On the other hand, think Buffet, John Templeton, much smaller list.

    Know who you are investing with, not just what.

    Is there a screen for that?

    Cheers to 2012! Peace, Prosperity, Health, Happiness to all y'all fools!

  • Report this Comment On January 01, 2012, at 12:31 PM, krabber wrote:

    I'd add Progressive (PGR) to that list of high insider ownership. Getting more concentrated as huge buybacks continue.

  • Report this Comment On January 01, 2012, at 6:31 PM, lowmaple wrote:

    when someone joins a company like apple or exxon only the extremely wealthy can own a large percentage of the stock so % of their total own wealth is what i look at for commitment level.

  • Report this Comment On January 02, 2012, at 2:56 PM, TMFKopp wrote:

    @lowmaple

    "when someone joins a company like apple or exxon only the extremely wealthy can own a large percentage of the stock so % of their total own wealth is what i look at for commitment level."

    This is a good point. The other thing I tend to look at is whether they're actually "joining" the company to run it. In a lot of cases, the folks running those companies have worked their way up through the ranks over the course of 20 or 30 years.

    Using XOM as an example, you're not going to find an Exxon founder running the company these days, but I like the loyalty that can be engendered through decades with the same company (Tillerson has been at Exxon for 35 years).

    Matt

  • Report this Comment On January 02, 2012, at 3:00 PM, TMFKopp wrote:

    @Sky Pilot

    "What source(s) do you use / recommend for ascertaining current inside ownership? Something quick and accurate."

    The quickest and easiest may be to use the Fool's CAPS screener (there's a criteria for "insider ownership"):

    http://caps.fool.com/Screener.aspx

    Otherwise, head to the SEC website (http://sec.gov/edgar/searchedgar/companysearch.html), look up the ticker, then look for the "DEF 14A" filings.

    Hope that helps!

    Matt

  • Report this Comment On January 03, 2012, at 7:32 AM, skypilot2005 wrote:

    On January 02, 2012, at 3:00 PM, TMFKopp wrote:

    "Hope that helps!

    Matt"

    Thanks,

    Sky Pilot

  • Report this Comment On January 03, 2012, at 4:30 PM, golfnski wrote:

    So what of the recent re-recommendation of Coach, which has insider ownership for ALL management under 1%?

  • Report this Comment On January 03, 2012, at 5:01 PM, TMFKopp wrote:

    @golfnski

    "So what of the recent re-recommendation of Coach, which has insider ownership for ALL management under 1%?"

    I'm not in a position to comment on the Coach recommendation specifically (b/c I'm not the one that made it), but here are a couple of thoughts that echo what's been said above.

    1) Though Lew Frankfort owns less than 1% of COH stock, his stake is worth $133 million. Compare that to, say, Corzine's $3 million at MF Global.

    2) Frankfort joined COH in 1979. He's not a mercenary, jobber, or hired gun. He's a man that's dedicated his career to a single company -- Coach.

    Matt

  • Report this Comment On January 03, 2012, at 5:37 PM, golfnski wrote:

    @TMFKopp -

    Thoughts along those lines occurred to me just after the post.

    Thanks!

    -mike-

  • Report this Comment On January 04, 2012, at 6:39 PM, melegross wrote:

    Interesting article. I'm not sure it's always correct though. As far as knowing the business, we had a failure at Apple with Scully, but Gerstner saved IBM perhaps.

    Steve Jobs stopped taking compensation from Apple except for a dollar a year back in 2003. Can anyone doubt he could have received anything he wanted, and would have been worth it?

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