Motley Fool Hidden Gems Investing - How to Evaluate Company Leadership

Episode Date: March 19, 2022

You probably can’t meet with the CEO of a company on your watch list, but you have some tools to evaluate them. Motley Fool Senior Analyst John Rotonti talks with fellow analysts Auri Hughes and Alyce Lomax about how to spot great business leaders. We also break into our archives to share a 2012 interview with former Costco CEO Jim Sinegal. Both conversations discuss: - Identifying great corporate leaders - How excellent CEOs balance stakeholder needs - Why company culture is one of the most important competitive advantages Want more tips for evaluating a CEO? Click here: https://www.fool.com/investing/2019/08/28/esg-investing-how-to-evaluate-a-ceo-using-the-4-cs.aspx Stocks: SHOP, COST, SBUX, ACN, HD, TXN, BRK, MSFT, AMZN Host: John Rotonti Guest: Auri Hughes, Alyce Lomax Producer: Ricky Mulvey Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Obviously when any manager that we look for we're always looking for somebody who's smart and who's hard-working and you know but the thing that really stands out in most instances is the passion if you don't have somebody who is passionate about the business no matter how smart and how creative and how diligent and how much money they have if they don't have the passion for the business you're not going to see the business driving in the right direction I'm Chris Hill, and that was Jim Senegal, the former CEO of Costco. He knows a thing or two about being a great business leader, and you're going to hear

more from him later in this episode. But this Saturday Classroom starts with a roundtable discussion featuring Motley Fool senior analysts John Rotonti, Ari Hughes, and Alice Lomax, as they share what they look for in great corporate leaders. you should keep an eye on ESG reporting, and a few lessons to be learned from legendary CEOs. Hi, Fools. I'm John Rotonti, and I'm here with Alice Lomax and Ari Hughes, and we're going to be talking about how we evaluate corporate management teams. Hi, Alice. Hi, John. How are you?

I'm doing great. Really excited to talk about this important topic with you. How are you doing, Ari? I'm good, John. How are you? Doing great. Doing great. So, Alice, over to you first. You're sort of our in-house guru when it comes to honestly evaluating good management teams and healthy corporate culture. So, what do you look for in a CEO and her corporate leadership team? Oh, thank you so much. I don't know if I'm the guru, but I do definitely enjoy looking at management teams and trying to get a good sense of corporate cultures. One thing that I really do like to focus on, and it often feels like a softer side of things, but is to try to look at

how corporate managements handle stakeholder issues, areas like environmental, social, and governance issues. You know, a company that has a good sustainability report that, you know, exhibits a lot of the things that it's doing on the employee side, on the environmental side. That goes a long way in giving me a sense of a corporate culture. And of course, you know, I love to read news articles about CEOs and, you know, look at areas like best places to work lists and so forth to try to get an idea of whether it's a healthy culture. That makes so much sense. And it's not just a moral judgment type of analysis, but it can also be good business, right? Like, if a company is treating its stakeholders well, including its employees, those employees will be more passionate about the business, right?

They'll be more engaged. They'll be better ambassadors of that business, which can drive growth, for example. Or if a company is trying to limit the damage that it's doing to the environment, that can also help them mitigate risks in the sense of regulatory risks, in the sense of fines they may have to pay for polluting the environment. So it's also good business, right, Alice? Absolutely. It's absolutely great business.

One of my favorite examples over the years, Costco, which has been known for treating its employees really well. Just an amazingly well-managed company. I also think that, you know, managements that look into these areas are showing a lot of imagination and a lot of innovation to be able to come up with new products in the future that address issues or mitigate risks. Exactly like you say, it is incredibly good long-term thinking that goes into looking at those issues. Yeah. And before we go to Ari, just that imagination and that innovation and that creativity that you're talking about, that drives growth and that will drive, it could drive

business value over time. So yeah, definitely. Ari, what about you? What do you look for when you're evaluating a CEO and a management team? Yeah. So from the CEO and management team perspective, I kind of have two categories. Um, and I think the first is kind of the standard, like hired gun, someone who's worked in the industry, um, very professional or has a good resume. And then the second one is I think kind of the founder led or, uh, someone that owns a big portion of the business, um, and is looking to solve a problem. They're very unique, uh, they're customer focused, almost obsessed on the product. Um, and you just kind of recognize after you see a few of these folks that they're a lot different than probably the standard management

team. So people that are interesting. Um, and I've learned from, uh, Tom Gardner on this kind of working with him on everlasting. Some of the things he looks for is, um, how focused is that leader? Um, how passionate is that leader? Is that someone, uh, they'd want to spend time with. So trying to under better understand those nuances, um, in leadership and being observant, is this an interesting person? Is this really unique? Is this someone like a Bezos or a Toby Lukey? Those are the type of things I'm starting to look for. That's awesome. I actually created a framework and published it on fool.com, I don't know, a couple of years ago, maybe, yeah, 2019. I called it the Four Cs, as in the letter C. I tried to really simplify my framework

down for myself. It turns out that what I look for can all start with the letter C. The first is, I look for a compassionate leader. A leader that treats people and the environment well. Genuinely compassionate and showing care for people and the planet. I look for a candid leader, that's the second C. A leader that is just as transparent about what is going wrong with the business and the things that they need to maybe fix or course-correct on as they are about what is going right with the business. So, candid was my second C. And then, capable was my third C. Obviously, I want a business leader that is very capable at operating the business, at capital allocation, which is different from operations, at building

great teams, at attracting and retaining talent, at all of these things. So, highly capable was the third C, and then the fourth C was committed. And that goes back to what Alice was talking about. Committed to running the business with a long-term perspective. Committed to taking a stakeholder approach to value creation as opposed to a strict shareholder approach, committed to understanding systems thinking, and that decisions that leadership teams make have consequences, both good and bad, not only for their company, but for all of their stakeholders, for society, for the communities in which they operate in, and possibly for the planet. And so those four Cs, compassion, candidness, capable, and committed are kind of how I simplify down the framework

that I look for. And then those four C's could honestly lead to two more C's, because those four C's could create the culture of the company, which is a fifth C. And then also, I think those four C's are what ultimately lead to compounding of business value. And so, yeah, I look for compounding CEOs. So that's just a fun little simplified framework that I've used to think about leadership. Alice, what do you think about that? Am I, am I completely off my rocker? Am I onto something? No, you are completely onto something. And I was just going to cut in and say, everyone should go Google that article and read it because I remember reading it and thinking it was amazing and so well put and well distilled. And I love your point about systems thinking,

Like that is huge. And again, it goes into that imagination, the creativity, the ability to, you know, kind of figure out different outcomes and go for the best ones. But yeah, that is an amazing framework and a great way of looking at it. I got that systems thinking framework from you. So I appreciate that. Go ahead, Ari. One thing I want to mention too, I think Alice was mentioning the best places to work. Glassdoor does an annual list of best places to work. I check on it and it's amazing because a lot of these are some of the best stocks. Looking at their 2022 list, NVIDIA, HubSpot, Bain & Capital, eXp Realty, Google, Lululemon, Salesforce, a lot of these companies are winners and have historically been winning stocks. So I think there's definitely something there to keep exploring about how happy the employees are, whether they're content, because there seems to

be a big correlation between stock performance and a great place to work. Yeah. And especially in the digital age, in this information economy that we live in today, it could be argued that a company's most important assets are their people. In a digital age, if you want to build digital moats, you need to attract and retain the best talent. And so really, your people become your most important assets and your widest source of competitive advantage or moat in this digital age. So maybe for our last question of this segment, Ari, over to you. What is one CEO that you really admire? Oh, gosh. I think, even though he's already quite popular, I think as I've gotten to know Toby Luecke and observed what he's created in his business and how it's R&D

focused and it's, uh, it's about creating, continuing to create innovative products for these, um, merchants, um, for these e-commerce, uh, people that need to do business online. Um, and then someone was even pointed out a small nuance is that the business is based in Canada. So if you're an engineer or a software developer, you may not want to go someplace where it's cold, but like, he's been able to like attract talent to this company, even though it's in maybe not the best climate. So, I think, as I've gotten to know Toby Luecke, I've been very impressed, and I think he's going to be probably one of the great business leaders in the future. There you have it from Ari, Toby Luecke from Shopify. What about you, Alice?

Wow, there are so many over the years to look back on as great CEOs. One of my favorites over the many years is Jim Senegal. Like I said, I mean, to bring up Costco again, just what he built at Costco was incredible. And, you know, even though Howard Schultz is no longer at the head of Starbucks, like he's one of my all-time favorites as well. I just feel like they both did a really great job of setting up really stakeholder-centric businesses. I would agree. And, you know, you mentioned Senegal and what he built at Costco. You know, We should mention that Craig Jelenic, the current CEO at Costco, has really picked up that torch and he's carrying that torch high. He's doing really, really good things at Costco.

That one has, I don't know, looking back on many, many, many years, that one has been just a truly great performer and just such a well-managed company. I'll tell you another great succession story before we end. Julie Sweet, the CEO at Accenture, I mean, she, you know, the shoes that she had to fill from Pierre Nanturme, who passed a few years ago, unfortunately, the shoes she had to fill were just incredible. And she, Julie Sweet, is doing an incredible job at Accenture. I think you all know that I love Craig Menear at Home Depot. He's actually retiring very soon and, you know, well-deserved retirement. And then I'll just throw out one last one, Rich Templeton at Texas Instruments.

So there you have it, Fools, how two of our top analysts on the Motley Fool investing team, Ari Hughes and Alice Lomax, how they evaluate corporate leadership. Thanks, Ari. Thanks, Alice. Thanks, Sean. Thank you, John. Thanks, Fools. You've heard about the leaders. now you're going to hear from one of the CEOs mentioned. Back in 2012, my colleague Brendan Burns interviewed Jim Sinegal.

And while the conversation is a decade old, Sinegal's insights hold valuable truths today on maintaining corporate culture, building long-term business relationships, and establishing competitive advantages. How would you define a competitive advantage And what would you say is Costco's biggest competitive advantage? Well, you know, the competitive advantage is that you've got loyal customers who believe in you.

And we think this was a tag that was hung on us a number of years ago by an analyst at Goldman Sachs. We think that we have established what we refer to as absolute pricing authority. And this analyst said that Costco, more than any other retailer in the world, has established absolute pricing authority. And what he meant by that was that when a customer sees a product in Costco, they'd expect that it's going to be the best value that they can find. And so we really very zealously work on protecting that image. That's what we're all about, saving customers money. And so we don't want to just be better in terms of price. We want to be demonstrably better on every single product that we sell.

Yeah. One of the things Costco is known for is a strong culture, and also you've made some great strategic decisions over the years. Could you talk about which one of those do you think is more important, culture versus strategy and how those come together? Well, I think, you know, I've stated this in the past, and my comment is that culture is not the most important thing in the world. It's the only thing. It is the thing that drives the business. I mean, that's what drives the strategy of our business is our culture, recognizing what we stand for in the customer's eyes and what we mean to all of the stakeholders in our business.

That is the culture of our business, and we would hope that we'll continue to sustain that. And if we do that, if we think in those terms, then I think the strategic planning will come right along with that. We recognize that you've got to continue to be better. Every day when you open the doors, it's like show business. It's another show. And we have to stay on top of our game because, as I mentioned to you earlier,

there are no annuities in this business. It's not a guarantee that they're going to shop with you next year if your presentation is ho-hum. Could you talk about how you maintain that strong culture, growing as fast as you have? You have thousands and thousands of employees both here, also abroad in Asia and the United Kingdom. How do you maintain a strong culture with being spread out and having so many employees? Well, you have to work at it. I mean, one of the things that we try to do, and we think of ourselves as a small company, and I know when you say, well, you've got 175,000 employees,

how could you possibly think of yourself as a small company? We like to think like a small company. It's more and more difficult. Every year that goes by makes it more difficult. But we think that if you're thinking and if your mentality is such that you're more adroit, that you're nimble and that you can move quickly, and we want to always try to stay in that position, in that posture, to be very adroit and very nimble and able to react quickly

and to stay ahead of the competition. How well we do that will determine how successful we are in the future. One of the things Costco is also known for is their low turnover. Other than financial incentives, what are some non-financial incentives that keep that number low that your employees really count on? We love them. I mean, listen, these are great people. Many of them have been with us since the early days of our business.

They've helped bring Costco to where it is today. They've developed it. They have played a pivotal role in everything that has been established over the last 30 years. So we want to keep them. to stay with it. We want to turn our inventory, but not our people. And part of that is, you know, people are happy with a job for more reasons than money. There's generally a pride in the organization. There's an attitude that there's security, that somebody does care

about them, that we're offering careers. We're not offering jobs. We're offering careers. Anyone who wants to become an officer of our company has that opportunity available to them. You know, one of the greatest satisfactions that I think if you were asked, many of us who have been here in management, one of the greatest satisfactions is to see young people who started working with us who maybe were college students and were chasing shopping carts out in a parking lot who have advanced to the point where they're senior managers of our company. That's a great feeling to see that. One of the things that we love at The Motley Fool is strong leadership, great management.

We actually name all our conference rooms out of different leaders that we admire. You actually have one at our headquarters. Could you maybe give us a couple other business leaders that you admire and why and what they do right? Well, sure. I mean, you know, I'm going to give you the obvious answers because they're the people that pop into my mind immediately.

And you admire different people for different reasons. But, you know, Warren Buffett clearly just jumps right off the page there and his partner, Charlie Munger, who's on our board. But Tony James, who is also on our board, is somebody that I admire greatly. I really have a tremendous amount of respect for him. I had an enormous amount of respect for Steve Jobs. The genius there was just incredible. To see that, to see the performance there was really something.

So there are lots of very significant people out there who do great jobs. I don't know Frank Blake at Home Depot, but I sure like the numbers that I'm seeing out of that business. And that was a turnaround situation. That was the one company that had started to slide a little bit. And I think he's not only done a good job, but you can generally tell when people talk well about the boss that something is going right there. What do you think are some common traits or characteristics that these CEOs have? Maybe an investor out there is looking at a lesser known CEO and they want to say, hey, what are some great CEOs?

What kind of traits do they have that you can emulate and look for in a company that might have a great leader? Well, I mean, it's always the same thing, obviously. When any manager that we look for, we're always looking for somebody who's smart and who's hardworking and, you know. But the thing that really stands out in most instances is the passion. If you don't have somebody who's passionate about the business, no matter how smart and how creative and how diligent and how much money they have, if they don't have the passion

for the business, you're not going to see the business driving in the right direction, in my view. So I would always look for that. You want those other traits, clearly, but you need somebody. Jamie Dimon is another guy who I think is a really good manager. I know he's gone through a little bit of a hassle here, but he seems to have come through it pretty well. I mean, I think he's an extraordinarily bright guy.

Could you talk about all the stakeholders of Costco and how you balance the different needs, be it employees, customers, suppliers? How do you balance those needs? They can be diverging at times, but are any more important than others? And what do you think about that? You know, our philosophy, Brendan, has always been that we've got essentially four things to do in our business. We have to obey the law. We've got to take care of our customers, take care of our people, and respect our suppliers. And we think if we do those four things, pretty much in that order,

that we're going to do what we have to do in the long term, which is to reward our shareholders. We think it's possible to reward them without paying attention to those four things. But we think in the short term. But if you don't pay attention to them in the long term, we think you stub your toe somewhere along the line. And, you know, we could have sold this business, Jeff and I, when we started, could have sold it dozens of times, I'm sure. Probably couldn't any longer because it's, and we don't want to. But we never had an exit strategy. That was never part of the equation.

We wanted to build an organization that was going to be here 50 and 60 years from now. We thought we owed it to all of the stakeholders in our business that they have that assurance, including the suppliers. You know, suppliers are investing money to take care of our business. They've got families also working in their organization that if we were to stop buying from them would be out of business or would be out of jobs. We think that we have an obligation to be fair to those individuals and to be concerned about the stakeholders. And they are definitely a stakeholder in our business. That's all for today, but coming up tomorrow, the inside story on one of the most successful acquisitions of the past 10 years, Instagram. As always, people on the program may have interest

in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening we'll see you tomorrow Thank you.