By Robert Miller | Portfolio Manager at NAOS Asset Management
A year ago we wrote an article about ‘5 CEOs Who Tick All the Boxes’ based on the ASX listed CEOs who we thought showed similarities to Tom Murphy. For those unfamiliar, Tom Murphy was the once in a lifetime CEO of US media conglomerate Capital Cities who started out managing a small radio station and after a 30-year career sold that business to Disney for $19bn. The Capital Cities share price went from below $10 to $12,000.
Looking back over the last 12 months, overall, this basket of ASX Listed businesses has performed very well however the key to a good CEO is a long-term time horizon, not just 12 months, and in our view success should be measured in years, or even decades.
As a refresh from our previous article, the characteristics we feel define a good CEO are:
- Consistency – consistent communication of strategy to the market.
- Tenure – being in it for the long haul, for both the good and the bad, to build a sustainable business.
- Alignment – skin in the game, working for shareholders best interests is mandatory.
- Commercial coat + lab coat – individuals who can focus on the commercial, money making areas and equally on the intricate operational details within their businesses.
- Non-financial – running a business is about more than just making money. How do they make a difference?
Now it is time for part 2 of ‘5 CEOs Who Tick all the Boxes’. In this article we refer to the above five points individually and highlight an ASX company CEO who we feel exemplifies that specific characteristic.
Mark Ellison – CEO, Elders Ltd (ASX.ELD)
It is always a gutsy move when a management team provide the market with a long-term strategy which includes identifiable and measurable targets. Quite often these are aspirational goals and are not achieved. In other instances, they are delivered upon and then recalibrated for the next 3-5 years.
In these instances where a CEO has delivered as they said they would the risk around gaining confidence for future earnings is reduced. Under the leadership of Mark Ellison, Elders is an example of this.
Previously an overleveraged conglomerate, one of the most recognisable brands in Australia has undergone a successful turnaround. ELD achieved their original FY14-17 plan and are now on a FY17-20 plan towards consolidation and growth.
The ELD strategy and business is being run under a ‘Buffett/Munger philosophy’ with everything focused around improving return on capital (ROC). Take a quick look through any ELD presentation or hear Mark Ellison speak and you will understand this is genuinely driving the business. Improvements relating to return on capital demonstrate a growing competitive advantage, which in turn delivers better returns for shareholders.
"The ideal business is one that earns very high returns on capital and that keeps using lots of capital at those high returns. That becomes a compounding machine." – Warren Buffett
Leigh Mackender – Managing Director, Service Stream Ltd (ASX.SSM)
Service Stream is a field force solutions business, providing essential contractor services to some of the largest telco and utilities businesses in the country. It has also been one of the great turnaround stories of recent times.
In our view it is not only a CEO’s tenure in the top job that counts but of equal importance is their progression through the corporate ranks. It shows loyalty and suggests an individual understands the business from the ground up which can be a valuable commodity.
Over a 13 year career at SSM, Mackender spent almost 10 years within the business divisions managing utilities projects and services. He then became CEO when the company was in a state of turmoil.
A young CEO, since taking control Mackender’s track record has seen half yearly EPS increase over 30x, all done whilst maintaining very conservative balance sheet. We believe a key component of SSM’s current success is the CEO’s ability to understand all aspects of the business. He hit the ground running and had an upper hand in management given his practical experience and knowledge of the company culture, systems and processes.
Michael Heine – Joint Managing Director, Netwealth Ltd (ASX.NWL)
For every dollar of profit, for every dollar of investment, for every dollar of cash flow, more than half is Michael Heine’s. A market darling since IPO in late 2017, Netwealth is run by a highly competent Co-Founder and Joint Managing Director with significant shareholder alignment. What’s more, there are other Heine family members involved in the business, principally Co-Founder and Joint Managing Director, Matt Heine.
NWL, a company whose share price has more than doubled since its IPO, has seen a sell down of only 7% from the above-mentioned father and son leadership teams’ total holdings, which sees them retain almost 55% of the company. Add in another family member and NWL is close to 70% family owned.
In addition, all three independent directors attended all 20 board meetings for the year, all are paid relatively modest amounts (on average $105k) and all are involved in the company’s long-term incentive plans. All these signs create strong shareholder alignment.
Two recent actions by major shareholder Michael Heine provide evidence that he is acting in the best interests of shareholders. Firstly, he chose to waive his short-term incentives package for the FY18 year and secondly, he has been buying shares on market within the last few days.
While instances are rare, as investors we like the concept of ‘early generation’ family run businesses with alignment created not only by equity ownership but also via individuals’ instilled family values which we believe create further alignment with shareholders. Put simply, if you are making decisions for your family business, you are likely to do so for the best long-term outcome rather than short term gain. As a shareholder, you can benefit from alignment of this kind.
4. COMMERCIAL COAT + LAB COAT
Jim Bindon – Managing Director, Big River Group Ltd (ASX.BRI)*
Despite being a 100+ year old company, Big River is a micro-cap most would not be familiar with. BRI is both a large-scale manufacturer of timber Formply (a product used in the pouring of concrete) and a distribution & building supplies company, akin to say a trade only Mitre 10 store.
From a ‘commercial coat’ point of view, BRI is undergoing an acquisition led expansion of its distribution & building supplies business. There are a large number of independent trade focused businesses which BRI is targeting to bring into the company. For this M&A role, dealing with small, non-corporate, regional based trade operators requires both financial discipline and an understanding of local competitive market dynamics.
From a ‘lab coat’ point of view, as with many Australian manufacturers, the existence of cheaper imports means a need for strict cost management and improvement efficiencies. To best position themselves against Chinese imports, BRI has been ‘flexing’ their manufacturing, whilst also improving returns on capital through more streamlined processing, waste reduction and energy procurement. Jim Bindon is constantly trying to streamline the BRI manufacturing operations.
Furthermore, during a recent site visit we found we were able to ask about any of the products on offer from the distribution & building supplies business (which has numerous stock keeping units), Jim had the ability to recount each of their use cases, costs, margins and customers. We found this very encouraging.
A blend of capital market and operational knowledge is a pre-requisite for any business to succeed, even more so for micro-cap businesses where responsibility and decision making falls on a smaller number of key individuals to deliver outcomes for shareholders.
Dr Colin Goldschmidt – Managing Director, Sonic Healthcare (ASX.SHL)
Dr Colin Goldschmidt has overseen it all as a CEO being at the helm of Sonic Healthcare since 1993. During the 26-year period under Dr Goldschmidt’s tenure, SHL has been transformed into a truly global healthcare business with shareholders enjoying TSR growth of close to 20% p.a.
What drives an individual to continue the grind and pressure of public CEO life after such a long period of time? The below statement from Dr Goldschmidt provides an insight into the culture he has developed:
“All too often, the success of public companies is measured only by short-term assessments of financial performance. However, it is our belief that consistent, long-term success is dependent on deep-seated values and cultural attributes which foster a pleasant and meaningful work setting, which encourages people to flourish.”
Any CEO who is principally financially motivated may not treat shareholders in the appropriate manner. The phrase ‘Medical Leadership’ is one which is littered throughout SHL’s documentation, which in our view, demonstrates a greater purpose than just a financial one. The relationship between culture and returns are inextricably linked. By focusing on non-financial aspects, over time the benefits to be achieved for shareholders can be significant and SHL is representation of that.
As those who are familiar with the NAOS investment philosophy will know, we believe the quality of management is a major factor in assessing any investment opportunity. Furthermore, we are big believers in the power of shareholder alignment to create long term value for shareholders. We adopt the attitude that no matter how good a company may appear on paper, if we are not comfortable with the CEO, we are unlikely to invest.
* NAOS Asset Management are substantial holders of Big River Group LTD (ASX.BRI)
Important Information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529 and is provided for general information purposes only and must not be construed as investment advice. It does not take into account the investment objectives, financial situation or needs of any particular investor. Before making an investment decision, investors should consider obtaining professional investment advice that is tailored to their specific circumstances.