The Million Dollar Portfolio team uses a straightforward, four-point framework in assessing the quality of any company's executive management: OATS (ownership, allocation of capital, tenure, and stewardship). I described the framework at some length here; today, I'm going to illustrate how to apply that framework with three CEOs who made the grade:
- Robert Wilmers, M&T Bank (NYSE: MTB)
- Lew Frankfort, Coach (NYSE: COH)
- Joseph Steinberg, Leucadia National (NYSE: LUK)
The following table summarizes the results for our four criteria:
- Ownership: We prefer CEOs whose interests are aligned with shareholders through a significant ownership position in the company they run.
- Allocation of capital: We like CEOs who have a track record of smart capital allocation decisions that produce good returns.
- Tenure: The length of time spent in the executive suite is linked to effectiveness and performance. We like CEOs who have demonstrated a long-term commitment to the company they are running.
- Stewardship: A "soft" quality, stewardship refers to the CEO's willingness to treat shareholders as true partners.
|
Robert Wilmers M&T Bank |
Lew Frankfort, Coach |
Joseph Steinberg, Leucadia National | |
|---|---|---|---|
| Ownership |
3.2% of shares outstanding (sixth- largest shareholder) |
1% of shares outstanding |
10% of shares outstanding (largest shareholder) |
| Allocation of Capital |
See discussion below |
5-year average return on capital: 37% |
See discussion below |
| Tenure (Average, S&P 500: 6 years) |
CEO since 1983 |
CEO since 1995 |
President since 1979 |
| Stewardship |
See discussion below | ||
| Annualized Stock Outperformance Over S&P 500* |
6.3% |
35.3% (!) |
15.3% |
*Measured on a total return basis (except for M&T Bank) from the date on which the executive was named CEO when possible or the earliest date for which stock data was available: M&T Bank (beginning date: July 16, 1985), Coach (Oct. 6, 2000) and Leucadia National (June 1, 1988).
Sources: Capital IQ and company websites.
Robert Wilmers, M&T Bank
Wilmers demonstrates good stewardship in the way he communicates with his shareholders. His shareholder letters are direct, and he's not afraid to admit to mistakes (this is exceedingly rare among company leaders).
Warren Buffett offered his endorsement when he said: "[M&T] has been run very well ever since Bob took over. The tone at the top is important in any business, but there is no business where it's more important than banking." Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) has owned shares of M&T Bank since 1991.
In terms of capital allocation ability, M&T Bank's recent acquisition of Wilmington Trust at a distressed price is a great example of the deal-making prowess that has propelled M&T Bank into one of the top three spots in all of its main markets. M&T Bank is a smart, focused acquirer -- this isn't empire-building of the sort that was practiced at Bank of America (NYSE: BAC) under Ken Lewis or at Citigroup (NYSE: C) under Sandy Weil.
Lew Frankfort, Coach
Selected by Barron's three years running as one of its 30 most respected CEOs, Frankfort is a 30-year veteran of the successful luxury goods retailer. In terms of capital allocation, the numbers speak for themselves, with a five-year average return on capital approaching 40%. Early in his career at Coach, Frankfort was instrumental in developing Coach's own stores and the push into international markets -- both of which have paid off handsomely.
Frankfort is one of the best-compensated CEOs in retail, and we'd certainly prefer it if he received a greater percentage of his compensation in restricted shares rather than stock options. Nevertheless, the company has been extremely successful under his leadership, and shareholders have been rewarded with great returns.
Joseph Steinberg, Leucadia National
Every year, Steinberg and Leucadia Chairman Ian Cumming write their letter to shareholders, which is frank and informative -- it clearly isn't the product of a PR flack. The very first page contains a long-term performance scorecard that stretches back to 1978, the year before Steinberg became president.
Smart investors value honest communication from the people who are entrusted with our capital, and Leucadia shareholders can have no regrets about having put their faith in Steinberg. The scorecard is enough to verify at a glance management's skill at capital allocation. From 1979 to 2009, Leucadia's book value per share grew at an annualized rate of 18.5% -- more than 10 percentage points ahead of the S&P 500 over a 30-year period. That's a world-class performance.
The next step
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