How to Kill a Great Stock

Financial publisher Value Line (Nasdaq: VALU  ) used to be a proud, successful business. But lately, the company is more like a punch line to a sad joke.

You see, Value Line ranks near the very top of modern corporate disasters. Though the losses involved have been comparatively small, Value Line's story is nevertheless heartbreaking.

It's time for us all to learn how one misguided leader can slowly and steadily destroy a great business.

The sad story
Value Line was founded in the throes of the Great Depression by an enterprising businessman named Arnold Bernhard. For decades, the company made money and served its customers well, delivering highly valued investment research tools, newsletters, databases, and even a branded line of mutual funds.

Over the past 20 years, however, business has simply languished. Value Line was not decimated by the slow demise of the print industry. It didn't lose analytical credibility, a reality that will forever stain credit raters like Moody's (NYSE: MCO  ) . One can't even really blame upstart competitors like Morningstar (Nasdaq: MORN  ) .

No, what happened to Value Line was former CEO Jean Bernhard Buttner.

The power of a terrible leader
In 1983, Arnold Bernhard took his company public and soon named his daughter Jean president of the publishing empire. His death just a few years later paved the way for her to take complete control.

To put the situation in perspective, since 1984 the S&P 500 has returned about 550% to investors. Value Line, meanwhile, has lost roughly 30%. Total revenues at Value Line for fiscal year 2009 were identical to revenues in 1987. Its premium subscription base is less than half of what it was in the mid-1980s. And the company recently posted its first net loss in nearly two decades.

Clearly, something went wrong under the eye of Ms. Buttner.

Now, in fairness, businesses decay and implode all the time -- look no further than AIG (NYSE: AIG  ) and General Electric (NYSE: GE  ) as evidence. But in this case, Value Line's shoddy long-term performance really boils down to four problems, all of which land at the doorstep of Jean Bernhard Buttner.

1. Wretchedness and inexperience
According to an article published in Crain's, Buttner's business experience before taking charge at Value Line amounted to "working at an interior design business with her husband." As if the complete lack of relevant business experience weren't enough, apparently there were some personality issues.

Numerous former and existing employees accused Buttner of being tyrannical, abusive, and intolerant. According to Bloomberg, employees faced pay cuts if they arrived to work late or were caught eating at their desks. Those who complained in public forums were summarily sued.

We know that being an intolerable personality is not necessarily detrimental to a company's bottom line (from what I understand, Apple's Steve Jobs is not exactly a peach), but we do know that the ritualistic driving off of talent is.

According to the same Crain's article, "Value Line was (under Arnold Bernhard) a training ground for scores of top Wall Streeters." Under Buttner, however, analysts faced excessively frugal compensation schemes (capped at half of the typical Wall Street rate) and what must have been a tough working environment.

2. A failure to acknowledge reality
Historian David McCullough once noted of Gen. George Washington that, "seeing things as they were, and not as he would wish them to be, was one of [Washington's] salient strengths." Buttner apparently had no such skill.

Like Rick Wagoner at General Motors, Dick Parsons at Time Warner (NYSE: TWX  ) , Dick Fuld at Lehman Brothers, and numerous other CEOs of failed (or failing) businesses, Buttner just never quite saw the reality of her situation. Times were changing fast for all businesses at the end of the 20th century, and yet she stubbornly clung to the antiquated publishing model of her father's generation. When the financial research industry began to move in a completely different direction, Value Line was essentially left behind.

3. Lack of accountability
Buttner had absolutely no one to answer to but herself, thanks to a nearly 90% stake in the company. The system of checks and balances normally in place to help management make effective and responsible decisions was largely absent. Her board of directors was filled with her children, relatives, and various acquaintances, and her management team was allegedly composed of cowering yes-men. Who was there to say "no"?

4. Greed
Like Bob Nardelli at Home Depot (NYSE: HD  ) and Anthony Mozillo at Countrywide Mortgage, Buttner's most noteworthy legacy is one of self-interest. Her declaration of a special dividend in 2005 worth $175 million substantially reduced the company's coffers -- and $150 million of it ended up in her very own pockets.

Perhaps more damning, however, is a 2009 SEC lawsuit claiming that since 1986, Value Line's mutual funds had been ripping off their clients and illegally raking in fees worth tens of millions of dollars. Buttner settled the lawsuit for $45 million, but acknowledged no guilt. Fortunately, the SEC also forced her to resign her position and end her control of the company.

The real tragedy
The combination of these qualities is, of course, deadly. Sadly for Value Line, the damage is already done; the business is long past relevant. Nevertheless, there are two important things to say here that go well beyond Value Line:

  1. Value Line, and companies like it, is the reason The Motley Fool cares so much about management. The CEO giveth and the CEO taketh away.
  2. There are plenty more Value Lines out there.

Buttner is just the tip of the iceberg. The tale is extreme, but certainly not unusual -- and that's why evaluating management is such an important part of investing.

The Foolish bottom line
Legendary investor Peter Lynch once said that investors should, "Go for a business that any idiot can run -- because sooner or later, any idiot probably is going to run it." But as Value Line illustrates, even a great company can be brought down by bad management.

That's why our Motley Fool Hidden Gems team looks for great businesses with great leadership -- and that means finding companies whose CEOs are:

  • Masters of their particular field.
  • Able to see the world as it really is.
  • Effective stewards of all three major constituents (shareholders, customers, employees).
  • Not there simply for the paycheck.

If you'd like to see what companies -- and what CEOs -- we like right now, click here for a free look at the service that has crushed the market since 2003 thanks in part to finding -- and investing in -- great leadership.

Fool Nick Kapur definitely does not own shares of Value Line, but he does own competitor Morningstar. Home Depot and Moody's are Motley Fool Inside Value recommendations. Apple, Moody's, and Morningstar are Stock Advisor choices. Motley Fool Options has recommended a write puts position on Moody's. The Fool owns shares of Morningstar. The Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (28)

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 February 01, 2010, at 4:28 PM, exGEer wrote:

    GE's dismal performance over the last decade can be attributed to one thing and one thing only: Jeff Immelt. A great company brought down by bad management by an idiot. 'Nuff said.

  • Report this Comment On February 01, 2010, at 4:40 PM, dabreeze212 wrote:

    Your article has so many inaccuracies, where do I begin? The 2005 dividend paid to common shareholders was a swoon to EVERY common stock shareholder, not just the CEO. If you owned the stock you got a tremendous dividend. What was it like $18.5/share? A similar dividend was paid in 1997. Did this go into your return calculations????? You don't seem to understand that there is only one class of stock. If the CEO wants to get paid, every other shareholder will get paid.

    True Valueline is a dying brand, but it will probably make more money in its death than...well you know I was going to say.

  • Report this Comment On February 01, 2010, at 6:09 PM, dabreeze212 wrote:

    If I own 1,000 shares, what do I care about the other 99.9% of shareholders? Oh, that's right I don't. Good for her that she gets 90% of the dividend. That doesn't change the fact that any shareholder gets the dividend. I'm happy with my 50% dividend payout as is she...like I said that doesn't matter. There is no need for massive reinvestment in this business. The employees aren't anything special and don't deserve to be paid like other "Wall Street" employees. Unfortunately for them (and fortunately for shareholders), they are completely expendable...they have nothing to do with the rating system...all they do is write up that little blurb.

    As for the "fraud," we are talking about pennies accumulated over many, many years...and this all added up to like $20M or so? Oh, and the company stopped this practice of charging for commissions several years ago, supposedly when an ex-employee brought it to the authorities attention. It really hasn't hurt their assets under mgmt so far...we will see what the next quarter brings.

    Like I said the business is dying, but it will still generate a lot of cash.

  • Report this Comment On February 01, 2010, at 8:01 PM, khabie10 wrote:

    dabreeze212

    You just accurately described the mentality of Value Line's former CEO, ie. a leader who lacks vision. Any leader who describes her workers as expendable is short sighted, which is why the company failed.

    The CEO should have been investing in quality people to continuously improve upon the Value Line system so that the company remains competitive.

    The fact that you state that the business is dying but still generates a lot of cash is that an optimistic statement? How are you going to value a dying business? That is not a simple process; highly likely it will be done through some distressed sale.

    Value Line's best bet is to get a new CEO who understands Value Line's system and has a detailed plan to turnaround the company around. Hence rescue the name of Arnold Bernhard.

    Its a shame that children destroy all the hardwork and the legacy of their parents.

  • Report this Comment On February 02, 2010, at 6:09 AM, traderuz wrote:

    Staff decide everything :) A good leader makes good business.

  • Report this Comment On February 02, 2010, at 11:57 AM, chk999 wrote:

    Paying out a strangely large dividend when management owns a lot of the company is one of theose stupid capital allocation tricks that should send you running from the company. At that point you don't know what management is going to do to sink the company, but you know they are going to.

  • Report this Comment On February 02, 2010, at 12:12 PM, dabreeze212 wrote:

    The company is not dead. They have an excellent balance sheet with no debt and hardly any liabilities, other than the provision for the lawsuit settlement...why would there be a distressed sale? You really don't have any idea what you are talking about, sorry to inform you.

    Stupid capital allocation trick chk999? What are you talking about? The company had huge retained earnings and no need to reinvest them in the business...what do you want them to do with the cash? Whether or not there is a 90% owner of the stock everyone gets a payday. What is so strange about that? How is that sinking the company? It isn't. Maybe some of you here need to read up on value investing and stop reading FOOLish research.

  • Report this Comment On February 02, 2010, at 1:03 PM, sid2286 wrote:

    Inconsistent, large dividends are a HUGE red flag for a company. It suggests an inability to make good decisions and focuses too much on the short term. Also, chasing off talent is the dumbest thing that a company can do... especially in the financial sector where people make up the majority of the company's assets.

  • Report this Comment On February 02, 2010, at 2:11 PM, khabie10 wrote:

    Dabreeze,

    A distressed sale does not mean it has to be balanced sheet related. According to the SEC Ms Buttner's stake has to be sold within a year. I would define this as a need for an urgent sale of assets because of negative conditions i.e. a distressed sale.

    However, once again you are missing the bigger picture. Which is that the company was terribly mis-managed by a myopic CEO (Jean Buttner).

  • Report this Comment On February 06, 2010, at 1:28 PM, azmfool wrote:

    I'll just add this: There is a reason we constantly evaluate management. There is a reason we constantly discuss value traps.

    Never argue with a fool (small "f"). They will drag you down to their level and beat you with experience every time. Sorry if this is harsh. Delet it if you must.

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