Charting the CEO 100 Index
May 1997
THE CHANGE LEADERS
Our sixth annual ranking of fastest stock-price growers features the CEO as effective change leader to achieve outstanding results, new ways to make successful change, and stars some remarkable return players and exciting newcomers
Click Here to See the Top Stock-Market Performers: 1994 - 1996
If you want to be on the CE 100 Index, you should focus on strengthening your skills as a change leader. Our CEOs usually focused on either locating new directions themselves and personally spearheading the change, or in establishing a climate where the changes could come from elsewhere and need careful support from the CEO. They drew on a wide range of changes, but constantly moved to reinforce the idea that continuing change is critical to current and future success.
The test of how well they are doing will come in how frequently they reappear in consecutive years on our list in the future. Currently that record is 4 years in a row, held by 4 companies and their continuing CEOs (4 last year who did not repeat this year, and 4 4-time repeaters this year). Only by leading change again and again can they hope to stay on top of this list of tough competitors.
In our most significant finding in six years of research, almost everyone we talked to on this year's list (please refer to page 13 for this year's CE 100 list) changed their company in fundamental ways during the last six years. Over two-thirds of their stock-price growth in 1994-96 came because of these changes, according to them. What's more, these CEOs have led their companies to a higher, continuing level of commitment to change, self-scoring themselves an 8 on a scale of 10. So we can expect more and larger changes in the future from them. As Manny A. Fernandez of the Gartner Group (87th in CEO performance and 13th in stock-price growth) told us, "Stay fast and flexible. The ability to change in today's business environment is critical to success."
Naturally, readers have always assumed that change was a big part of being on the list because rapid growth requires that. If you compound revenues at 40 percent a year, you probably have to double your employment every two to three years.
What is particularly impressive about this performance is that most companies must rely on a so-called "burning platform" to create the incentive for change. This idea comes from the comments by an oil field worker who dived into the North Sea and survived rather than be burned to death on the platform of an oil rig. Except in a few cases, these CEOs are creating a desire to change when their company's performance and rewards for employees and shareholders have been quite good. By accomplishing this change-driven growth, the CE 100 CEOs have helped establish a new level of leadership performance.
A Special Vision of Change for the Future
What is new in our findings is that these companies greatly redirected themselves, while doing a fine job of handling the pressures of rapid growth. Why? Max P. Watson, Jr. of BMC Software (37th in CEO performance and 93rd in stock-price growth) said, "I agree with Andy Grove's (of Intel, 18th in CEO performance and 63rd in stock-price growth) theory: 'Only the paranoid survive.' If you don't see things changing, you should be afraid. You also have to understand your core competencies."An important source for the quest for change may come from the frequent choice of a company vision to be the premium firm in their industry. That goal is often supported by a shared culture of personal integrity, customer focus, growth, and rewarding shareholders (including employees) with rapid gains.
An Important New Way to Build Stock-Price Rapidly: Successfully Acquiring Your Way to the Top
Of these changes, the most common form was to make one or more significant acquisitions. Our change leaders must be quite talented to accomplish this difficult integration, because academic research from business schools shows that acquisitions seldom succeed. The task is considered even more difficult if the companies are growing very rapidly or have been struggling, yet our change leaders have found effective ways to lead with this approach. Not since the heyday of Harold Geneen in the 1960s have acquisitions played such an important role in stock-price growth among leading companies. A very timely example of that trend is the February 26th announcement by Eric A. Benhamou of 3Com (16th in CEO performance and 27th in stock-price growth) and Casey G. Cowell of U.S. Robotics (8th in CEO performance and 16th in stock-price growth) of their plan to merge and create a worldwide networking solutions leader.
John J. Lee of Hexcel (42nd in CEO performance and 71st in stock-price growth) is an excellent example of this kind of leadership, directing the company from a troubled financial past that included bankruptcy in part by combining itself through mergers with two key competitors. Peter Aseritis, an analyst at CS First Boston, observed that "John Lee is . . . the bankruptcy chairman, the turnaround specialist and the strategic visionary. Hexcel dominates the industry now. They are turning around internally and breaking down the barriers between (newly-acquired) Ciba and Hercules and themselves."
Henry R. Silverman of HFS (29th in CEO performance and 54th in stock-price growth) has built an enormous company quickly by acquiring brand names in many service areas like hotels and real estate agencies. Camille Humphries, who covers HFS for Alex. Brown and Sons, noted that "HFS is in an ever-evolving state. There has been a torrid pace of growth. The numbers indicate a great transformation. Henry Silverman operates very strategically. He focuses on strategy and finance, but he also knows what's going on and he keeps in touch with the business managers on a daily basis."
The Key Pathways to Change
If you want to focus on the changes that came with the fastest stock-price growth, look to expanding your product line, scope of product development, expanding internationally, and shifting your shareholder base.The CEOs told us that they had the highest regard for changes in business strategy, entry into new markets, the company culture, the company's mix of business (68% made changes here), the company's messages about itself, the shareholder base, and new product or service innovation. Joseph C. Hutts of Phycor (91st in CEO performance and 99th in stock-price growth) suggested that other CEOs "build a culture around the twin goals of protecting your base business and stimulating change. It sounds inconsistent, but it works."
These companies were stimulated to change most often by listening to customers and other stakeholders. In fact, James F. Lyons of GenRad (15th for CEO performance and 84th in stock-price growth) advises fellow CEOs to "listen, listen, listen."
Many executives find making changes to be a very difficult challenge. Our CEOs tell us that both using generous stock-based compensation and involving everyone who must change in the vision behind the change are very helpful. When we looked at the factors most associated with fast stock-price growth, a common company culture of commitment to rapid company growth worked best. James D. Cole of Newpark Resources (38th in CEO performance and 66th in stock-price growth) advised:
"(1) Spend time developing communication and culture with your people.
(2) If you want to change, openly communicate that goal and have key employees help shape the plan toward implementation of the goal. Most good ideas come where the 'rubber meets the road.'
(3) Share the success for the change.
(4) Provide incentive for the result.
(5) Successful change will make the next project easier."Interestingly, the direction for the changes came from the top-down in half the companies while it bubbled up from the bottom and middle in the other half. In the top-down companies, the CEO generally seized on the idea for change and led the change. In the bottom-up companies, the CEO focused on creating a supportive environment for change. Over half the ideas generated from the bottom were successfully implemented at our change leader companies, and a quarter of the CEOs identified one or more key change agents (employees) they encouraged us to speak to. Some companies achieved success rates for bottom-up ideas of over 80 percent. An untapped potential seems to exist to learn how to do more of both at the same time.
This Year's CE 100
Many people assume that the list is almost all tiny companies, since it should be harder to grow fast as a company becomes larger. Actually, twenty companies are over one billion dollars in annual sales including Intel (almost $19 billion), Safeway ($17 billion), Microsoft ($9 billion), Seagate Technology ($8 billion), Sun Microsystems ($7 billion) and Nike ($7 billion). On the other hand, 11 are under $100 million in annual revenues. The median size is $380 million, which is usually described as a medium-sized company. In total, two-thirds are large or medium-sized companies.
Other people tell me that they recognize few names on the list. Perhaps that is because so many of these companies were small firms just 5 years ago. Despite this dated perception of where these companies are today on the part of some readers, these companies are giants in another dimension. At the end of 1996, many were enormous in stock market capitalization. Intel was worth $107 billion with Microsoft just a shade below that level at $98 billion, surpassing all but a few of the "household names" in the stock market. The median size was $1.5 billion (what many people call a medium capitalization stock), and 38 were worth over $2 billion. Thirty-nine were worth under $1 billion (the threshold for a small capitalization stock), with all having at least $500 million in equity market capitalization.
A good reason for unfamiliarity with some may be the specialized nature of what they do. Many are found in technology fields (especially computers) that CEOs may not visit nor hear about on a daily basis, while their CIOs and heads of research do.
If change agents are so important, why do we not find the names that the financial press dotes on like Al Dunlap? We looked into this, and found that Mr. Dunlap's track record to date has not qualified him for our list. First, his companies prior to Sunbeam (such as Scott Paper) grew their stocks more slowly than the 100th company on the list during his past tenures at these public companies. Second, he has not yet held a CEO job for 3 years, which is one of the requirements to be on this list. Since we measure our years beginning in January, we will start counting him as of January 1997 at Sunbeam for the list that we will publish in the year 2000. Will he be there? Will the stock price be up more than 233 percent (what our 100th company accomplished from 1994-1996) from the price at the beginning of January? If Sunbeam's stock price is, will that be good enough to make that list, or will the minimum requirement rise even higher by then? (Last year, the minimum needed was lower, at 185 percent.) Only time will tell, and we wish Mr. Dunlap good luck.
Perhaps one of the lessons of this research is that the financial press, business school research, and some CEOs are too focused on the largest companies and those who are most successful in demanding attention to accurately identify what best practices are for CEOs who achieve outstanding success. Would it have been worthwhile to study Bill Gates (of Microsoft, 10th in CEO performance and 68th in stock-price growth) while his company was a promising smaller company? Many CEOs in his industry and investors of all stripes wish that they had.
In short, what you are looking at are companies with a high potential to be the leaders of the large, influential firms in North America of the 21st century. In the early part of the 20th century, electric streetcar companies were once a hot investment area. Some of these companies may well share a similar fate in the new century, but it is a mistake to ignore where positive change is focused. That is the fountainhead of the future.
You should pay particular attention to those who lead the CEO performance index rankings. This list is topped by Joseph B. Costello of Cadence Design Systems (19th in stock-price growth), followed by Charles A. Haggerty of Western Digital (28th in stock-price growth), Michael S. Dell of Dell Computer (11th in stock-price growth), Darryl D. Fry of Cytec Industries (12th in stock-price growth), and Aubrey K. McClendon (1st in stock-price growth).
For our look at how change plays a role in CEO's lives, we spoke to 27 CEOs along with a number of their colleagues, a number of security analysts, and profiled three of the companies in the CE Index's top 10. Here's what else we found out.
Who's Back and Why
Companies that repeated on the list from last year showed no clear pattern, unlike a year ago when we observed a strong combination of sales and book value growth coupled with a high-ending rank in ROE and profit margin. This year the most common factor (a mild one) was rapid sales growth. Our repeaters among the top ten show that characteristic with Corrections Corporation of America, 3rd last year (Doctor R. Crants at 5th in stock-price growth and 85th on the CEO performance index), and PeopleSoft, 18th last year (David Duffield at 7th in stock-price growth and 49th on the CEO performance index), benefiting from strong demand for their services.
Overall, 7 of last year's top ten repeated this year: Tellabs, 4th last year (Michael J. Birck is on for the fourth straight year at 25th in stock-price growth and 22nd on the CEO performance index); U.S. Robotics, 5th last year (Casey G. Cowell, 16th in stock-price growth and 8th on the CEO performance index -- but remember that if the merger goes through, he will not be back); BMC Industries, 6th last year (Paul B. Burke, 30th in stock-price growth and 71 on the CEO performance index); Safeguard Scientifics, 7th last year (Warren V. Musser, 17th in stock-price growth and 73rd on the CEO performance index); Altera, 8th last year (Rodney Smith, 58th in stock-price growth and 13th on the CEO performance index); and Phycor, 9th last year (Joseph C. Hutts, 99th in stock-price growth and 91st on the CEO performance index). Unfortunately, our choice of CEOs to profile was flawed for two of the three who were featured did not return.
Despite the turnover in the CE 100, there are four companies and CEOs who are now 4-for-4. These four -- Tellab's Birck, 3Com's Benhamou (16th last year), Clear Channel Communication's L. Lowry Mays (12th last year, 75th this year in stock-price growth and 97th on the CEO performance index), and Maxim Integrated Products' John F. Gifford (24th last year, 87th this year in stock-price growth and 28th on the CEO performance index) -- grew their stock prices an average of 96 percent from June 1995 to June 1996 compared with the S&P's growth of 25 percent. Nine other CEOs made the list for the third consecutive year. These 13 repeaters grew their stock prices by 116 percent from June 1995 to June 1996.
Who's New and Why
In performance terms, the new arrivals primarily gained attention through extremely rapid earnings-per-share growth. About half the group were aided primarily by revenues that soared while the other half managed their profit margins to a higher level.
There was plenty of room at the top, with 8 of the top 10 slots going to newcomers -- led by Chesapeake Energy's McClendon. This company marks a stark contrast with the typical computer hardware or software company on the list, since their business is oil and gas exploration, until you look more closely. Then you notice that they have greatly benefited from new technology that allows companies to use seismic information in better ways to locate petroleum and new drilling methods that permit horizontal drilling.
Technology is a dominant theme in this group, with Zitel (Jack H. King at 2nd in stock-price performance and 23rd on the CEO performance index), McAfee Associates (William L. Larson at 3rd in stock-price growth and 43rd on the CEO performance index), Zoltek (Zsolt Rumy at 4th in stock-price growth and 51st on the CEO performance index), Dura Pharmaceuticals (Cam L. Garner at 6th in stock-price growth and 11 on the CEO performance index), Vitesse Semiconductor (Louis R. Tomasetta at 8th in stock-price growth and 7th on the CEO performance index), Computer Horizons (John J. Cassese at 9th in stock-price growth and 69th on the CEO performance index), and Rational Software (Paul D. Levy at 10th in stock-price growth and 67th on the CEO performance index) rounding out the rest of the top ten newcomers.
Some of these companies may not return next year, not being able to duplicate their remarkable performances of the last 3 years. Some are likely to return because of the strong demand for the services they provide. McAfee Associates, for instance, provides services to eliminate software viruses that can devastate a computer and its user. The fastest growing part of the market is combating the rapid growth of these nasty viruses.
A Final Word of Advice About Changing in the Future
We asked our CEOs what advice they would give other CEOs on making the right changes and having them be easy, effective and sustainable. Some of this advice called for setting the stage for change. Cambridge Technology Partners' James K. Sims (24th in stock-price growth and 89th on the CEO performance index) feels that "my peers should invest time and energy in working with stakeholders (particularly employees) to develop a set of core internal and external values that embrace rapid change as a virtue." Cytec Industries' Fry suggests "finding the right hooks first that break tradition . . . which shows you are very much into changing at upper levels and make sure they are visible." Wisconsin Central Transport's Edward A. Burkhardt (73rd in stock-price growth and 53rd on the CEO performance index) encourages CEOs to think in terms of "a team effort -- lay the groundwork and communicate." Tellabs's Birck reminds us that "Change is never easy. Learn from customers, listen to your people, and talk to them. Of course, it helps to start with good people!"
Perseverance is important. Varco International's George I. Boyadjieff (78th in stock-price growth and 80th on the CEO performance index) says "Work very hard on the changes while neglecting traditional, day-to-day activities." McAfee's Larson warns us that "the decision you make is the one you are going to stand by -- don't flounder. This is like Columbus in 1492, when people told him 'You don't know where you are going,' and Columbus replied, 'You're wrong, I'm going down the 38th parallel.'" Goldcorp's Robert R. McEwen (92nd in stock-price growth and 100th on the CEO performance index) puts it bluntly, "There is no easy way. Be prepared to push hard and be persistent. Do not hesitate to shift senior staff if unsupportive."
Donald W. Mitchell is chairman and chief executive of Mitchell and Company, a financial and management benchmarking and consulting firm in Waltham, Massachusetts focusing on how to make successful, rapid improvements in organizational performance. He is also chairman and CEO of OUTSTANDING CHIEF EXECUTIVE OFFICERS, SHARE PRICE GROWTH 100 and LEADING CHIEF FINANCIAL OFFICERS, collaborative research organizations directed by leading executives and their companies. Additional research and analysis for this article were conducted by Mitchell and Company's Carol Coles, Amy Feather, Joan Henson, Kim Loomis, and Sarah Christopher.
Origins of the CE 100
The CE 100 was begun in 1992 to test the proposition that outstanding CEO leadership can make a difference in company performance, and to learn from those who are most successful over a period of years. That work has been expanded since then to examine how the CEOs with the most rapidly growing stock prices solve the current problems that every CEO faces. Each year, we look at a new set of issues and reexamine our past perspectives for their recent accuracy. We continue to find that these top CEOs are different from those described by other researchers, and that their range of skills is expanding versus the average CEO. Since many CEOs repeat on this list, this research has also become a way for them to learn how to improve from each other.
Running the CEO Numbers
In this year's interviews, CEOs told us that they played a key role in initiating and supporting significant changes that accounted for the bulk of their exceptional stock-price growth. What kind of performance did they deliver?Since 1992, the CE 100 -- a set of companies that delivered superior stock-price gains over the prior three-year period with the same CEO in place has cumulatively outperformed the benchmark S&P 500 Composite Index. Provided you buy the portfolio at the end of the month the list is published in CE, the first five lists cumulatively are up 113.0 percent compared with the S&P 500 at 84.5 percent during the 12 months following publication. Despite this, we are disappointed that the 1993-1995 list was trailing the S&P 500 through December 31, 1996, and will continue to watch the remainder of the year's performance with interest.
To compile the latest list, covering 1994 to 1996, we accessed the Value Line database of more than 6,500 public companies traded in North America and narrowed down to the 100 fastest growing stocks that:
- Had the same CEO from January 1, 1994 to December 31, 1996.
- Were public from 1994 to 1996.
- Had a market value of its public common stock that exceeded $500 million at the end of 1996.While the CE 100 will not always outperform the S&P 500 (as happened with the 1990-92 list and the 1993-1995 list through December 1996), the CE 100 Index has exceeded the track record of more than 99 percent of professionally managed portfolios since we began publishing the list in 1992, despite our not using debt leverage or derivatives to boost the return.
Adding appropriate debt leverage and derivatives would probably have expanded the returns to almost double the growth rate of the S&P 500.
In general, the high volatility of these stocks dictates positive results when the stock market is strong (as occurred in 1995) and relative underperformance in years when medium and smaller caps lag the market (as occurred in the latter half of 1996). Since the Index took on its current character (beginning with the 1990-1992 list), the Index has done almost as well in outperforming the smaller cap Russell 2000 (90.0 percent to 69.7 percent) as it has with the larger cap S&P 500 (90.0 percent to 68.0 percent).
The 1992-1994 list rose by 42.6 percent while the S&P 500 grew by 25.4 percent for a full year; the 1993-1995 list rose 2.7%, while the S&P 500 expanded by 10.7 percent from May 31, through December 31, 1996.
Last year, we looked at how to select from among the repeating stocks the ones that will most outperform the S&P 500. This strategy outperformed buying the whole list of 100 stocks from May 31 through December 31, 1996 (8.3 percent to 2.7 percent while both trailed the S&P 500 at 10.7 percent). 3Com was the highest performer on that list with a 49.0 percent gain, but has weakened substantially in the first quarter of 1997. Using the same process from the current list, the indicated stocks to buy now are 3Com (again), Corrections Corporation of America, Global Marine, Oxford Health Plans, and PeopleSoft. Constantly seeking improvements for you, we developed a second process for selecting the fastest growers that identified Corrections Corporation of America, HBO & Company, Medic Computer, Oxford Health Plans, PeopleSoft, and Phycor. An interesting approach may be to buy the companies that appear on both minilists -- Corrections Corporation of America, Oxford Health Plans, and PeopleSoft. We will continue to report the results a year from now, and provide new suggestions for you to consider.
However, this investment approach provides only a small number of stocks with limited industry diversification. If those industries weaken, your investment returns probably would suffer in the 12-month period, as well. And if the market is falling or technology stocks are weak when you read this article, you should probably wait until things level out before purchasing shares.
Battling The Benchmark - A Performance History of the CE 100
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 * +42.6 +25.4 1993-1995 List * +2.7 +10.7 Cumulative Change +113.0 +84.5*1993-1996 list is through December 29, 1996, 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; 1993-1995 list-May 31, 1996.
Cumulative change is through December 31, 1996. Cumulative change numbers combine performance of lists in 12 months following publication, or through December 31, 1996, in the case of the 1993-1995 list.
Source: Mitchell and Co.
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