As he watched the program, he learned both are super predators and are often in direct competition with one another. However, here’s the difference between the two. Lions typically hunt together in a group (called a pride), so that they can go after bigger game, which means more food for everybody. Instead of having a single dominant leader, as is commonly believed, males have equal status, as do females. In contrast, hyenas group together only when hunting is easy: After an easy kill, they disband. On their own again, they go back to scavenging carcasses. Status is extremely important to hyenas, with a higher rank netting more respect within the troop. They do not build a team under them except when it immediately benefits them, and loyalty is weak. If a hyena becomes wounded or weak, the troop abandons that hyena. Interestingly, the hyena recognizes the lion’s status: As the hyena’s only natural predator, the lion commands the hyena’s respect.
Tan applied these differences in the animal world to management styles. Table 7.1 summarizes the contrasts.
Table 7.1 Contrasting the Management Style of Lions and Hyenas
Source: Interview with Seng Hock Tan October 2010.
Lion Manager Hyena Manager
Committed to ethical and moral values Has little interest in ethics and morals
Thinks long term and maintains a long-term focus Thinks short term
Does not take shortcuts Just wants to win the game
Thirsty for knowledge and learning Has little interest in knowledge and learning
Supports partners and alliances A survivor and an opportunist; works mostly alone
Treats employees as partners Treats employees as expenses
Admires perseverance Admires tactics, resourcefulness, and guile
Tan goes on further to explain that a lion manager is able to build the infrastructure for a 100-story skyscraper, whereas a hyena manager can construct only a five-story building because it can be done in less time: Investing and building a long-term infrastructure taxes the nature of the hyena. For example, investing in a team and sustainable infrastructure takes a lot of time, which a hyena manager does not have the patience to do. The hyena continually enriches himself by repeating the short cycle of building and selling five-story buildings. Hyena managers never build the more valuable 100-story building that lasts longer than a five-story building. As Tan says, “The hyena manager is therefore an opportunistic trader, not an all-season builder of a lasting structure.”
Although, the skyscraper will generate huge returns for its investors over long periods of time, the flipped five-story building, although profitable to the lone hyena, will generate more limited returns for outside investors.
Tan explains further: “How did Apple catapult from $5 billion in market capitalization in early 2003 to a market cap of $220 billion?” Tan contrasts Apple with Palm, which brought out the pioneering Palm Pilot product. Why was Palm, with a $90 billion market cap at its peak, bought out in 2010 by Hewlett-Packard, as Seng Hock asks, “for a mere $1.2 billion?” The difference was that Apple was run by a Lion manager: Steve Jobs.
Most competent early-stage companies do not cross the chasm to an established business because they lack the lion manager’s infrastructure—the teamwork, the know-how, the necessary institutional structures, and the culture. This is the groundwork needed to survive and grow sustainably, and it is why companies run by lion managers become multi-bagger investments.
As you look at the manager on a personal level, also note characteristics that indicate how likely they are to be able to build and lead an effective team. Look for their lion characteristics. Does the manager value people more highly because of power, influence, or what they can do for them? Or do the managers consider themselves to be better than those around them? Perhaps they are extremely nice to you and your friends, but when they deal with a waiter, for instance, they are rude. In other words, they are nice to people they consider to be important, but disrespectful to others whom they consider beneath them. If you are engaged in a conversation with someone and a higher-status person walks into the room, does your conversation end as they quickly leave to join the higher-status person? This is a hyena characteristic.
For example, I remember attending Berkshire Hathaway annual meetings and speaking with many of the CEOs who run subsidiaries of Berkshire Hathaway. Often, someone else would walk up to them and tell them that someone important, such as another CEO, wanted to speak with them. Even though they did not know me, they continued to answer my questions and didn’t cut me off. In contrast, most of the money managers I knew well would immediately walk away mid-sentence if someone passed by whom they thought was more important. Look for managers that display the lion characteristic of showing respect for people, regardless of status. It is a strong predictor of their ability to command the respect of others, and an important leadership characteristic.
The hyena/lion metaphor is a powerful tool for evaluating managers. When Tan and his team interview managers, one of the first questions they ask themselves is whether the manager is a lion or a hyena. This is an easy-to-use and highly effective tool, and the mental imagery may be extremely useful for quickly summarizing the character of a manager.
36. How did the manager rise to lead the business?
To understand the management team’s background, start by constructing a chronology of the careers of the top five managers, using the biography section found in the company’s proxy statement. The goal is to get the details of a manager’s career so you can map out the manager’s professional life. You need to use historical proxy statements, going back at least five to 10 years, because in more recent proxy statements, earlier jobs are not emphasized. You can then fill in the gaps of the manager’s career by reading articles written about the CEO and the other top four managers over a 10-year period.
For example, by using a combination of historical proxy statements and articles, my firm compiled the career of Larry Young, CEO of Dr. Pepper Snapple Group, shown here:
2008: Remains CEO when Dr. Pepper Snapple Group spins from Cadbury
2007: CEO/President of Dr. Pepper Snapple Group (Cadbury)
2006: President and COO of Cadbury Schweppes Bottling Group (Cadbury acquires Dr. Pepper/Seven Up Bottling)
2005: Joins as President/CEO of Dr. Pepper/Seven Up Bottling Group in Dallas
2005: Leaves PepsiAmericas
2002: EVP of Corporate Affairs for PepsiAmericas
2000: President/COO combined company for PepsiAmericas/Whitman
1999: COO of Pepsi General Bottling (operating company of Whitman)
1998: EVP and COO of Whitman and Pepsi General Bottling
1997: President, Pepsi General Bottlers—East European Division
1996: President, International, Pepsi General Bottling
1995: Vice President of Sales and Marketing—International, Pepsi General Bottling
1994: Director of Sales and Marketing—International, Pepsi General Bottling
1989: Director, On Premise Sales & Marketing for Springfield Pepsi General Bottling
1969: Begins his career with a Pepsi franchise (Pepsi General Bottling) as a route salesman in Springfield, Missouri.
This is a very detailed biography; in contrast, if we had used only the 2009 proxy biography for Larry Young, we would have a more limited view of his career, as shown below:
Larry D. Young, President and Chief Executive Officer and Director, age 55, has served as our director since October 2007. Mr. Young has served as our President and Chief Executive Officer (our “CEO”) since October 2007. Mr. Young joined Cadbury Schweppes Americas Beverages as President and Chief Operating Officer of the Bottling Group segment and Head of Supply Chain in 2006 after our acquisition of Dr Pepper/Seven Up Bottling Group, Inc. (“DPSUBG”), where he had been President and Chief Executive Officer since May 2005. From 1997 to 2005, Mr. Young served as President and Chief Operating Officer of Pepsi-Cola General Bottlers, Inc. and Executive Vice President of Corporate Affairs at PepsiAmericas, Inc.
Ask questions such as:
Does the manager have a background in operations, marketing, or finance?
Did the manager jump from job to job, or does he/she have a long tenure in the industry?
Why are there gaps in his or her employment history?
Pay particular attention to how much interaction the manager has had with both customers and employees. For example, determine whether the manager has a lot of experience in operating the business or if the manager’s career has been limited to the corporate suite. If the manager has been a controller, treasurer, or CFO, and was then promoted to CEO, then most of that manager’s time has been spent in the corporate suite. In contrast, if the background of the manager is VP of Sales, VP of Marketing, COO, and then CEO, that manager has had more interaction with the operations and customer base of a business.
Be Aware of the Risks of a Manager with a Non-Operating Background
A related risk you may be exposed to is that managers who have risen from inside the corporate suite of the business often do not make good operators. This is because they have less experience with the day-to-day operations of the business. If the managers have spent most of their careers in the corporate executive office, then how will they know how to operate the business at the customer level? These managers have a narrow view of the business due to the fact that they have only viewed the business from one particular angle. This traps many managers into a constricted way of thinking about the business. Their past interaction with the employees of the business will have been more limited, as well.
For example, there is no doubt that new drug development has suffered in the pharmaceutical industry as more of the CEOs who lead these companies are promoted from within the corporate suite (such as managers who have been CFOs or General Counsels), or from outside, unrelated businesses instead of CEOs with science backgrounds. As a result, most pharmaceutical firms have not had many blockbuster drugs from 2000 to 2010 and many currently face their patents expiring, without any drugs in the pipeline to replace them.7
Merck’s greatest stock market returns came during the time it was managed by Roy Vagelos, who was a scientist (both chemist and doctor) and worked as head of Merck’s research department and then CEO, from 1978 to 1994. Vagelos changed the way Merck did research by emphasizing scientific discovery. Under his tenure, he brought in hundreds of new scientists and modernized Merck’s labs. He also focused on new product categories like cardiovascular treatment. He sought and found what he termed “really better people who wanted to work in drug development.” When Vagelos led the research department, he increased R&D spending by an average of 17.2 percent a year. Merck focused R&D on cures that were needed, instead of making questionable improvements to existing drugs, as most pharmaceutical firms did. During Vagelos’s tenure, 10 major new drugs were launched, such as Vasotec and Prinivil for hypertension and Pepcid for heartburn. When Vagelos retired in 1994, Merck had the best and largest marketing staff, and led the pharmaceutical industry in sales.
However, Vagelos’s replacement, who was chosen by the board (and not Vagelos), was Raymond Gilmartin, who joined Merck from Becton Dickinson, a medical device maker. He was an outsider who simply did not understand the culture of innovation. As a result, the talented scientists left the business, and Merck’s ability to develop new drugs suffered dramatically.8
Similarly, take a look at General Motors. Alex Taylor documents the decline of GM in his book Sixty to Zero: An Inside Look at the Collapse of General Motors—and the Detroit Auto Industry. Taylor writes that GM’s best years were when it was led by such innovators as CEO Harlow Curtice, who led GM from 1953 to 1958. Curtice had started out as a bookkeeper, but he gradually became a super salesman who developed a shrewd understanding of how design created buzz and sold cars. Under his tenure at Buick, sales doubled. As Taylor notes, “Curtice may have been the last GM CEO who wielded so much power in the design studio.”
After Curtice, GM was run by managers who were mainly accountants and who therefore placed more emphasis on cutting costs, instead of worrying about what was coming out of the design studio. For example, Fred Donner was an accountant who directly succeeded Curtice, and he spent his entire career operating GM from New York City instead of Detroit. He seldom visited car factories, and most of what he knew about the operations was from executive meetings, balance sheets, and reports. He was focused on cost-cutting rather than designing cars that sold well. Taylor makes a good case for the idea that GM’s failure took root during this period as these cost cutting CEOs kicked down the road many of GM’s problems.
How Much Experience Does the Manager Have with the Customer Base?
If a business’s success hinges to a great degree on management’s capabilities, as it does in restaurant chains, you will typically take less risk if you invest in managers who have a lot of experience with the customer base. Avoid those who have spent most of their careers in the corporate suite or who have served customers in a different type of industry.
For example, in 2002, Jack Stahl left his job as president of The Coca-Cola Company to attempt a turnaround at cosmetics company Revlon. Stahl had been at The Coca-Cola Company for 22 years and Revlon’s board had great faith in him, believing that his disciplined approach to operations was just the thing Revlon needed. He brought in financial experts and statisticians, and reduced the company’s debt. Unfortunately, he also changed the way Revlon marketed its products. As Revlon launched new products, it lost many of its old customers. Some of the new products had higher prices and didn’t use the powerful Revlon name. In the four years after Stahl assumed control of Revlon, the company suffered continued losses as well as a two-thirds decline in Revlon’s share price. Stahl left Revlon in 2006.9 Although Stahl had done an excellent job at The Coca-Cola Company, he was ill-equipped to deal with the nuances of running a cosmetics company.
Does the Manager Have Experience with Most Operations of the Business?
You want to get a sense of the manager’s understanding of all the divisions and functions of the business. Ideally, a manager would have experience in multiple positions.
For example, Tom Folliard, CEO of used-car retail chain CarMax, joined CarMax in 1993 as a senior buyer and became director of purchasing in 1994. He was promoted to VP of merchandising in 1996, SVP of store operations in 2000, EVP of store operations in 2001, and president and CEO in 2006.10 Therefore, he has led most of the major divisions at Carmax, and he understands what it takes to operate each division effectively. This experience reduces the risk to investors that Folliard will fail to execute. Even more important, it improves his credibility with employees within the company because he has managed most of their departments in the past.
What Is this Manager’s Previous Track Record in Operating a Business?
As you read articles written about a manager, be sure to learn about their past accomplishments or lack of accomplishments. For example, James Adamson became CEO of retailer K-Mart when it entered bankruptcy in early 2002. Previously, he was a member of K-Mart’s Board of Directors. To determine whether Adamson had the ability to lead K-Mart, you could have reviewed his past history by reading both the proxy statement and historical articles. From 1995 to 2001, Adamson was CEO of the Advantica Restaurant Group, which owned Denny’s. He was brought in when Denny’s faced many lawsuits for discriminating against black customers, and he successfully transformed Denny’s public image issues into a number-one ranking in Fortune magazine’s “Best Companies for Minorities” category i
n 2000 and 2001.
However, during Adamson’s tenure at Advantica, the company lost $98 million in 2000 and $89 million in 2001. After Adamson assumed control of K-Mart, he was equally unsuccessful at returning the retailer to profitability. Adamson’s track record of losing money should have alerted investors that he was probably not the best choice for leading K-Mart through a restructuring.11
This wasn’t the first time K-Mart had missed the mark on manager appointments. Before Adamson was promoted as CEO, K-Mart had brought in Charles Conaway as CEO and Wal-Mart veteran Mark Schwartz as CFO. Conaway was past president and COO of pharmacy retailer CVS Corporation and Schwartz joined from Wal-Mart (K-Mart’s biggest competitor) where he had worked for 17 years. Many investors were excited to hear that Schwartz had joined the business because of his experience at Wal-Mart. Schwartz made many bold statements to investors on how he was going to tackle Wal-Mart head on.
However, Schwartz’s track record wasn’t as encouraging as his rhetoric. Had you studied his resume, you would have seen that two of the companies he ran before working at Wal-Mart—home products business Hechinger’s and Big V Supermarkets—had landed in bankruptcy. Two years after Conaway and Schwartz were brought in, K-Mart declared bankruptcy.12, 13
Why Was the Manager Promoted?
You need to determine why a manager was promoted to his or her current position. For example, in 2010, Merck promoted Kenneth Frazier to CEO. Frazier had been with Merck since 1992, and had served in several roles including that of General Counsel. He was known for developing the controversial legal strategy of fighting every case filed against Merck’s pain drug Vioxx, rather than settling all the cases jointly in a class action lawsuit. This strategy had helped save Merck hundreds of millions of dollars.14
The Investment Checklist Page 23