There are no guarantees in the world of investing, but it's no mystery why so many tenured investors strongly consider the quality of a company's CEO before buying its shares. To be sure, the effective leadership -- or lack thereof -- of any given CEO is arguably one of the biggest influences of a company's ability to create shareholder value. In our short-term-oriented world, it's especially important to see such value created over long periods of time, considering those shares are, first and foremost, small slices of the underlying business.
How do you go about quantifying that performance? Consider the latest issue of Harvard Business Review, which did exactly that through its annual "Best-Performing CEOs in the World" report.
This isn't a popularity contest
For this year's list, HBR started by taking the names of the current CEOs of every company in the S&P Global 1200, which covers 70% of the world's stock market capitalization and consists of firms from North America, Europe, Asia, Latin America, and Australia. Next, they excluded CEOs who had been arrested or convicted of a crime. Then, to ensure they had data that was both reliable and long-term in nature, they excluded CEOs who started in their role before 1995 or after April 30, 2012. That left them with 832 top CEO candidates from 827 companies (several had co-CEOs).
Finally, to come up with a truly objective measure -- which meant ignoring any perceived celebrity status, reputation, or popularity -- HBR ranked them from 1 (best) to 832 (worst) based on shareholder returns and market capitalization from the start of their tenure through April 30, 2014. For this, they used a combination of three metrics:
- Country-adjusted returns -- to account for gains attributable to improvements in the local stock market.
- Industry-adjusted returns -- to account for gains resulting from "rising fortunes for the overall industry."
- Change in market capitalization -- to account for CEOs who started their tenure at larger companies, where larger relative returns are harder to achieve.
An (absent) honorable mention
Of course, the post-1995 requirement notably eliminates Berkshire Hathaway's (NYSE:BRK-B)(NYSE:BRK-A) Warren Buffett, who many consider to be both the most effective investor and CEO alive today.
From the time Buffett took the helm of Berkshire in 1965 through the end of 2013, Berkshire's per-share book value gained an astounding 693,518%. At the same time, consider that between the beginning of 1995 and HBR's April 30, 2014, cutoff, shares of Buffett's Berkshire returned 847% -- not too shabby considering the S&P 500 simultaneously returned around 491%.
According to HBR, however, the top 50 CEOs in their list delivered even greater total shareholder returns averaging 1,350%.
By this measure, Bezos is best
But in the end, one CEO's performance stood far above the rest: Jeff Bezos of Amazon.com (NASDAQ:AMZN):
Bezos technically founded Amazon back in 1994, but the company only went public in 1997. Based on HBR's calculations as of April 30, 2014, Bezos achieved a country-adjusted total shareholder return of 15,189% and an industry-adjusted return of 14,917%, and he grew Amazon's market cap by $140 billion in the process.
What's so remarkable is how Bezos has gone about creating that value -- namely, by eschewing profits in the traditional sense in favor of consistently investing Amazon's cash back into the growing the business itself. But that doesn't mean Amazon.com couldn't churn out profits based on generally accepted accounting principles if it so chose. As HBR's Daniel McGinn put it:
The other big misconception: that Bezos doesn't care about profitability. By all accounts Amazon's mature businesses (such as online retail) are profitable; it's his deep investments in new businesses that create accounting losses, which he regards as a false measure of performance.
Bezos' unorthodox approach has also remained static from the beginning. Take his first letter to Amazon shareholders in 1997 -- seriously, it's worth a read -- where he wrote, "We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions."
He also insisted, "When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows."
Never have those words been more applicable than today.
Just last week, shares of Amazon fell 8% after it announced that net sales for the third quarter increased 20% year over year to $20.58 billion. The trouble, in Wall Street's eyes, was that those sales somehow translated to a net loss of $437 million. Meanwhile, operating cash flow for the trailing 12 months jumped 15% to $5.71 billion, while free cash flow nearly tripled over the same period to $1.08 billion. And sure enough, Amazon's consolidated cash flow statement shows nearly $1 billion in net cash used in investing activities over the past three months alone.
And no, Amazon's recent drop still wouldn't affect Bezos' position at No. 1. In fact, at around $290 per share as of this writing, shares of Amazon currently sit only slightly below their April 30 closing price. Further, HBR says Bezos would have still maintained his top rank even if Amazon stock had dropped all the way to $250 per share.
As a long-term-oriented investor myself, I can only hope our fickle market provides such a buying opportunity.