As an analyst, I am too often focused on the numbers surrounding a company. What's the EPS relative to the growth rate? Are accounts receivable growing in proportion to revenues, yada, yada, yada.
One thing that often gets overlooked is company management. Quality management is worth its weight in gold.
Some executive headhunter must have figured that out before me because executive pay packages are out of control. Too often we hear about golden parachutes in the tens of millions of dollars. Even after orchestrating the fiasco at Mattel (NYSE: MAT), Jill Barad walked away with nearly $50 million. Michael Ovitz spent less than a year and a half at the helm of Disney (NYSE: DIS) and pocketed something in the range of $100 million, depending on when you value the termination package. That's $0.15 for every share of Disney! Give me a break.
Some managements do their job beyond expectation and are not motivated by the money. How do you motivate men like Bill Gates and Larry Ellison? And, what about the manager of all managers, Jack Welch of General Electric (NYSE: GE)?
Microsoft's (Nasdaq: MSFT) Gates isn't worried about his retirement. Let me put it this way: Bill gave nearly $16 billion to his foundation in 1999 and was still the richest person on the planet. (See who Fools are giving to this year and how you can help at Foolanthropy.) Ellison is nipping at Gate's toes for the title of richest man and committing more time to Oracle (Nasdaq: ORCL) than ever before.
Welch helped build GE into the most highly capitalized company on the planet. He grew GE's market cap from $14 billion to more than $500 billion today. Here's one for perspective. The Dow was below 1,000 when Jack got the call for the top office at GE. At 65, he is still fired up about the prospects of his company. He takes pride in his work.
These guys are not motivated by money. (Well, maybe Ellison is a little.) They're proud of what they do. They're inspired to create and build something monumental. But, perhaps most of all, they are competitive. I suspect that the need to win drives them more than the need to eat. After all, what good is another billion when you already have so much?
Over the holiday weekend, I witnessed this competitive fervor. I was playing Hearts with a good friend of mine, several of his family members, and his father, Bob Herbold, COO of Microsoft. And, let me tell you, there is nothing like the sight of a father ruthlessly trying to destroy his children (all in the spirit of the game, of course) to drive home this point. The thrill of victory knows no bounds.
Over the last few years, several management teams or managers have caught my eye for these very same reasons. Their work, better yet their accomplishments, stood out as above the call of duty. My jester cap comes off to honor these two FOOL 50 management teams.
Charles Schwab & Co (NYSE: SCH)
Putting your wealth and reputation on the line is not something you would expect from a billionaire. But, in the mid-'90s, that is exactly what Charles R. Schwab did. In 1995, Schwab and Co-CEO David Pottruck, who was president and COO at the time, greenlighted a fundamental change to the company. They dropped online commissions to $30. Compared to the $80 received for phone-based or live-broker transactions, this fee restructuring would cost the company $125 million a year in foregone revenues. Yet, they did it anyway and took the heat from Wall Street.
Mr. Schwab does not get credit (nor does he claim it) for coming up with the idea of transforming his namesake into a Net company. Rather, he gets credit for recognizing the inevitable and instituting a plan that would prepare his company for the future. That type of thinking is what prompted me to invest in Schwab.
Cannibalization was inevitable. It was simply a matter of time before technology and the Internet would completely restructure the value of instituting a trade. While David Komansky, the blinded-by-fear CEO of Merrill Lynch (NYSE: MER) sat around in denial, Schwab built systems, developed software, and eventually transformed the company into the undisputed leader in online trading. Komansky finally got religion when, on December 28, 1998, Schwab's $25.5 billion market cap topped Merrill's $25.4 billion. David had scared Goliath.
Enron (NYSE: ENE)
It would be easy to argue that Enron, the second-largest operator of gas pipelines in the U.S., was at the right place at the right time. Its business of operating pipelines gave it perfect access to the rights-of-way needed to lay fiber optic cables across the country. But, Enron has gone far beyond just becoming another telecom provider.
Enron executives are capitalizing on the company's true expertise as a market maker. It has created a system whereby bandwidth can be traded just like a commodity at the Chicago Board of Trade (CBOT). Maybe Hillary should try her hand at bandwidth futures?
This utility, led by CEO Kenneth Lay and COO Jeffrey Skilling, thinks and acts more like an Internet start-up than a stodgy old-economy company. Not only did Enron capitalize on an opportunity, it changed the way several industries operate. Utility deregulation led to its ability to buy and sell natural gas and electricity, but management showed us that a monopoly could be reborn as an innovator.
Jack Welch gets it now. Scott McNealy -- the Big Cheese at Sun Microsystems (Nasdaq: SUNW) -- never doubted it, and Bill Gates wants a piece of it. Even David Komansky has signed on. It's the Internet, stupid.
The Internet is not about selling stuff online. It's not about putting old-economy companies out of business. It's about productivity. It's about making old-economy companies more efficient. Think of it as a re-allocation of capital -- human capital.
Charles Schwab and Enron are perfect examples of the cleansing power of the Internet. It forced managements around the world to rethink their business models, questioning the value they provide. Schwab and Enron stepped up to the plate and hit it out of the park. These motivated management teams grabbed market share and reengineered their respective companies without fear of change and with full regard for one of the underlying principals of capitalism: Only the strong survive. Adam Smith would be proud.
Want to read about other companies with Foolish management teams? Check out our Industry Focus 2001. It is 190 pages of industry coverage on 17 sectors to watch in 2001.