Charting the CEO 100 Index
May 1996
Our fifth annual ranking of stock-price stars features a host of new players, some long-term residents, and a few critical insights into corporate management trends.
Click Here to See the Top Stock-Market Performers: 1993 - 1995
If you're looking for a dramatic increase in your share price, this might just be the formula: Make sure you're in the right industry (technology, for example)-or at least in one that's ripe for market-share growth. Be a CEO with real vision and a sharp focus. Surround yourself with smart, motivated, empowered people. Start from a low base. And, as a company, don't be too well-known.But even if you're in command of all those factors, don't be surprised if your success-by this measure, anyway-is fleeting, measured much the way Andy Warhol measured fame. Just because you lead the pack this year doesn't mean you won't drop toward the bottom 12 months from now. And that wouldn't necessarily mean you've failed your shareholders, or you're a bad CEO, or your company is a less-than-worthwhile investment: Chances are, a close look at measures you influence such as book value per share, earnings per share, equity market capitalization, return on common equity, net margin, cash flow per share, and revenue per share will boost your CEO performance rating far above that of executives who merely watched their companies' stock prices go through the roof as they became credible for the first time. After all, as they say, a steady hand stays the course.
This year's CE 100-and, especially the top 10-is dominated by technology companies, with most of the highest performers operating in technological areas outside the rather troubled computer category. And 63 of the top 100 are brand-new entries; in fact, only one of this year's top 10 was even among the CE 100 last year-Tellabs (4 this year, 7 last)-and last year's top performer, DSC Communications, dropped down to 66 this year.
On the other hand, this year's recipient of the top CEO Performance Index rank (a new measure introduced this year that seeks to level the playing field among industries by looking at other relevant measures of growth and success) is Ken Levy, whose KLA Instruments dropped to 35 on the CE 100 from 29 last year. No. 2 is Wilfred Corrigan, whose LSI Logic rose from 20 to 17 in share-price performance alone. And defying the trend entirely at No. 3 is Arthur del Prado, whose Advanced Semiconductor Materials hit No. 1 on this year's CE 100-the first time it's ever made the list. The industry served by all three of these companies: semiconductors.
To get a sense of what this means, as a guide to both management and investment, we took a close look at the numbers and the measures, checked in with a number of analysts, surveyed 47 individual CEOs, and profiled three of the companies in the CE Index' top 10. Here's what we found out:
EXHIBIT I: - Battling The Benchmark
CE 100 Performance: Stock-price changes for 12 months following publication of list
12 months following CE 100 S&P 500 1989-1991 List +12.1% +9.8% 1990-1992 List -4.8 -1.4 1991-1993 List +36.3 +22.7 1992-1994 List * +20.6 +15.5 Cumulative Change +75.4 +53.4*1992-1994 list is through December 29, 1995, only. Dates of purchase are end of month published as follows: 1989-1991 list-September 30, 1992; 1990-1992 list-June 30, 1993; 1991-1993 list-July 29, 1994; 1992-1994 list-May 31, 1995.
Cumulative change is through December 29, 1995. Cumulative change numbers combine performance of lists in 12 months following publication, or through December 29, 1995, in the case of the 1992-1994 list.
Source: Mitchell and Co.
WHO'S BACK AND WHY
Companies that repeated from earlier lists showed a fine balance of growth in both sales and book value per share, combined with a high-ending rank in ROE and growth in profit margin. This was particularly true of Tellabs, Applied Materials, and KLA Instruments. "If you don't control expenses while keeping up and staying focused," notes Tellabs CEO Michael Birck, "you cannot be successful. We try to avoid bureaucracy like the plague, encouraging open communication of decision making as close to the customer as possible."
Although they may have soared above repeaters in terms of share-price increases, newcomers generally trailed repeaters in other performance measures, indicating that without further performance gains in 1996, they may not make the list next year.
Despite the turnover in the CE 100, there are four companies and CEOs who are now 4-for-4. These four-Lawrence Coss of Green Tree Financial (34 this year), Thomas Golisano of Paychex (79), James Morgan of Applied Materials (28), and Phillip White of Informix (72)-grew their stock prices an average of 118 percent between June 1994 and June 1995 (compared with the S&P's growth of 23 percent). Fourteen other CEOs made the list for the third consecutive year. These 18 repeaters grew their stock prices in 1995 by an average of 66 percent.
WHO'S NEW AND WHY
According to analysts, this year's new kids on the block share some common traits:
Product demand: ASM, notes Leonard Sanders, an analyst with Needham & Co. in New York, has "had a couple of strong products that have really been able to gain market share. There's been a big upswing in demand, and the future for semiconductor demand in general is very strong." Similarly, adds Needham's Michael Christinziano, US Robotics (5) "has participated in the explosion in remote access to corporate and public data resources. Internet service providers use their equipment, as do all the people who buy modems to access data."
Focused, visionary CEOs: ASM's del Prado, says Sanders, is "a very hands-on technological chief executive." BMC Industries' Paul Burke (6), notes Charles Webster, an analyst with Piper Jaffray in New York, has "tremendous vision for the company and for the individual businesses. He has a tremendous ability to set the right operating benchmark." And Casey Cowell of US Robotics, adds Christinziano, "started the company with a few hundred dollars in electronic components. He's built a company that's going to do more than $1 billion this year."
A solid team: "The people at Safeguard Scientifics (7) are absolutely outstanding," says James Hartke, an analyst with Laidlaw Equities in New York. "After working at it, they've got together criteria of how to pick companies and how to make money doing it." At PhyCor (9), adds Kimberly Purvis of New York-based Donaldson Lufkin & Jenrette, Joseph Hutts has "surrounded himself with a lot of smart people."
EXHIBIT II: - MEASURING UP
What's the most effective way to benchmark a CEO's performance? CE 100 executives say:
Financial results (growth in revenues/earnings) . . . . . . .73% Employee measures (results of satisfaction surveys) . . . . .43% Shareholder rewards . . . . . . . . . . . . . . . . . . . . .41% Performance for customers (satisfaction survey results and account turnover rates) . . . . . . . . . . . .39% Strategic objectives . . . . . . . . . . . . . . . . . . . . 16% Respondents also said the board of directors should focus on: Financial measures . . . . . . . . . . . . . . . . . . . . . 54% Strategic objectives . . . . . . . . . . . . . . . . . . . . 46% Shareholder rewards . . . . . . . . . . . . . . . . . . . . .39% Performance for customers . . . . . . . . . . . . . . . . . .22% Employee measures . . . . . . . . . . . . . . . . . . . . . .20% Shareholders should look at: Shareholder rewards . . . . . . . . . . . . . . . . . . . . .65% Financial measures . . . . . . . . . . . . . . . . . . . . . 39% Long-term performance . . . . . . . . . . . . . . . . . . . .15% Predictable/consistent company performance . . . . . . . . . 11% Customers should measure CEOs by: Product or service value . . . . . . . . . . . . . . . . . . 46% Product and service quality. . . . . . . . . . . . . . . . . 33% Customer service and ongoing support . . . . . . . . . . . . 18% Product innovation . . . . . . . . . . . . . . . . . . . . . 11% Employees should assess CEOs by: How their job is providing personal growth and career opportunities . . . . . . . . . . . . . . . . . . . 72% A quality work environment . . . . . . . . . . . . . . . . . 37% Compensation . . . . . . . . . . . . . . . . . . . . . . . .28% Security and growth of a competitive company . . . . . . . . 22% Suppliers should evaluate: Total relationship with the company . . . . . . . . . . . . .71% Sales growth . . . . . . . . . . . . . . . . . . . . . . . .21% Receiving timely payments . . . . . . . . . . . . . . . . . 19% Communities should consider: Community employment . . . . . . . . . . . . . . . . . . . .43% Community leadership . . . . . . . . . . . . . . . . . . . .38% Charitable giving . . . . . . . . . . . . . . . . . . . . . 33%Source: Mitchell and Co.
WHAT MAKES FOR A TOP PERFORMER
A look at the measures evaluated to determine the CEO Performance Index also shows that the companies that achieved the most rapid stock-price growth, such as ASM (1), Stratacom (2), and AGCO (10), also evidenced high combined performance in growing book value, cash flow, and earnings per share. On the other hand, the slowest stock-price growers on this list, such as Compaq, which dropped from 27 last year to 97 this year, ranked low in every measure except sales. Although Compaq was moving merchandise off the shelves, the rough-and-tumble personal computer business eroded its margins.
Other research conducted by Mitchell and Co. indicates an additional benefit to experiencing equally high performance in book value, cash flow, and earnings per share: This combination appears to attract the attention of the largest possible number of institutional investors. Rapid revenue growth rarely has this effect, except in the case of start-ups, such as Safeguard Scientifics, the public venture-capital firm that ranked No. 7 this year.
EXHIBIT III: - IT'S ALL IN THE PROCESSWhat management processes did CE 100 executives turn to in order to stimulate share-price growth?
Building a more entrepreneurial way of working . . .89% Eliminating layers of management . . . . . . . . . 65% Total Quality Management . . . . . . . . . . . . . 61% Re-engineering . . . . . . . . . . . . . . . . . . 51% Economic Value Added . . . . . . . . . . . . . . . 49%Source: Mitchell and Co.
WHAT'S KEY IN MEASURING A CEO'S PERFORMANCE
When measuring their own performance, the CEOs we surveyed say they favor a combination of factors, including financial results, employee measures, shareholder rewards, performance for customers, and strategic objectives (see Exhibit II). James Morgan of Applied Materials (28 on the CE 100; 20 on the CPI) says the best way to measure him is to see how well he has anticipated "transition points in his industry [semiconductors] and the needs of companies to capitalize." Peoplesoft's David Duffield (18, 44) has an even more personal test. "You never stop learning," he says. "I learned from my prior experiences that in the service industry, where software is intellectual property, the business is 100 percent people."
EXHIBIT IV: - CEO CONCERNSExecutives reveal where their strategic focus lies:
Maintaining financial results . . . . . . . . . . . . . .41% Having an adequate supply of new products/services . . . 27% Bolstering employee effectiveness . . . . . . . . . . . .25% Continuing company growth . . . . . . . . . . . . . . . .18% Maintaining competitiveness . . . . . . . . . . . . . . .11% Adding technical expertise . . . . . . . . . . . . . . . .9% Dealing with the investment community . . . . . . . . . . 7% Prospering despite the economic environment . . . . . . . 7% Handling government regulation . . . . . . . . . . . . . .2%Source: Mitchell and Co.
WHAT CEOS ARE DOING TO IMPROVE
CEOs say they are employing a range of tactics and measures to improve both their performance as managers and on Wall Street. They're building a more entrepreneurial way of working; eliminating layers of management; following the teachings of TQM; re-engineering functions, divisions, and whole companies; and looking into the principles of Economic Value Added (see Exhibit III).
More specifically, Morrie Abramson of Kent Electronics (62, 80) says, "We walk the talk. We espouse trust in our leaders to meet commitments that we have all agreed upon and empower them to make decisions to effect those results. There is a mutual trust-you have to recognize the risk, and that time and time again, you are going to be disappointed."
Jack Rehm of Meredith Corp. (87, 84) says, "About 10 or 12 years ago, we started focusing on new product development, especially with our magazines, and devoted a lot of time and energy to new concepts. We have had success using an entrepreneurial style that lets people develop ideas and launch them, leading to profitability. We delegate to let people feel responsible for the growth in their areas." Peoplesoft's Duffield adds, "Part of our value system is innovation. We encourage experimentation and new service initiatives. We let people do their own thing with some guidance to achieve the final results we want."
Discussing work style, Applied Materials' Morgan says, "We are the largest in our industry, and to manage on that scale we have developed the 5x5 process, made up of five business units that have global responsibility by account. We are the leading company in establishing partnerships with global high-tech companies." John Wood of Thermedics (54, 51) shared his experience in the same area. "We want to avoid the malaise that has stricken larger companies, that the larger a company gets, the more difficult it is to motivate employees. Thermedics forms a new competing business, offering incentives by spinning out so they have a company all their own. In this way, the good and bad performance is not reflected in the parent company's stock price."
Robert Shillman of Cognex (11, 40) notes it's critical that the people and the opportunity match. "We have been able to attract, motivate, and retain unique people who are bright and perseverant. Our motto is ïWork hard, play hard,' and people are rewarded when they perform well."
"The challenge," adds Thermedics' Wood, "is to attract strong talent in leadership, management, and technology." With more people, however, come new challenges. Lynn Fritz of Fritz Cos. (71, 89) explains, "We have more size to deal with since three years ago, and we are dealing with twice as many people. Mobilizing a work force of 7,000 can be quite daunting." Doctor Crants of Corrections Corp. of America (3, 47) observes that "making sure employees understand your strategy and their role is incredibly important. We do not think we can increase shareholder value unless we grow employee understanding. One measure of how well we are doing is substantial employee participation in our stock-purchasing program."
So, how critical are stratospheric stock-price gains in measuring corporate success? Respondents divide along lines reflecting how capital intensive their business are. Meredith's Rehm feels it's a key indicator. "The key to stock-price growth is performance," he says. "And we need to maintain superb performance; there is no substitute for that. With expectations high for the future, the investment community will expect us to grow at a similar rate over the next three years." Maintaining growth, says Applied Materials' Morgan, is important. "The key for us," he says, "is to continue to demonstrate performance and help investors understand the opportunities Applied Materials has for the Information Age." But Peoplesoft's Duffield, whose company is less dependent upon raising capital, shifts the emphasis. "Stock price reflects how people value you," he says. "And we watch it. But if our customers are happy, they are our best salespeople. They'll help us sell our products."
Donald W. Mitchell is chairman and chief executive of Mitchell and Co., a financial and management consulting firm in Waltham, MA. He is also chairman and CEO of Outstanding Chief Executive Officers and Share Price Growth 100, collaborative research organizations directed by leading executives and their companies. Additional research for this article was conducted by Mitchell and Co.'s senior consultant, Amy Feather, and by free-lance writer Jonathan Burton.
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