Motley Fool Money - Investing Lessons from “Succession”

Episode Date: April 29, 2023

You can’t buy shares of Waystar RoyCo, but investors can still find helpful takeaways from the award-winning HBO series and the fictional company’s leadership. Ricky Mulvey talks with Motley Fool senior analyst Jim Gillies about: - Whether CEO succession plans are worth investor attention - “Succession” storylines that rhyme with real ones - Questions about Berkshire Hathaway’s next stage - One bold prediction about the end of “Succession” SPOILER ALERT: This episode discusses plot points for “Succession” through season 4 , episode 5. Companies discussed: WAYA, GOJO, BRK.A, BRK.B, DIS, AAPL, LMVUY, GE Host: Ricky Mulvey Guest: Jim Gillies Production Assist: Mark Underwood Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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I am wary when a CEO makes himself part of the show. And Steve Jobs was very much, for rightly or wrongly, very much part of the show. Tim Cook likes to stay in the background. And another example I'm going to give you here is what I call the dueling Bob's Disney, Bob Iger, Bob Chapic. Bob Iger absolutely makes himself part of the show. I'm Chris Hill, and that's Motley Fool senior analyst Jim Gillies. We're putting an investor's lens on the TV show,

Succession, the award-winning HBO series about Waystar Royco, a fictional media conglomerate, and the drama that surrounds the family running the business. Ricky Mulvey caught up with Gillies to talk about the real-life companies that parallel Waystar Royco and the challenges of investing in larger-than-life CEOs. And before you start listening, let me warn you right now. This episode does include spoilers for Succession. So if you watch the show and you haven't caught up through episode five of season four, consider yourself warned.

With my spoiler alert out of the way, let's get started. So while I'm giving people time to tune out if they haven't seen season four, episode five, I'm going to, I want to vamp a little bit outside of the show. I think CEO succession for a lot of businesses is often followed, but I don't know if it's actually important to track. It's really difficult to judge and also asking people who are CEOs, what's going to happen after you pass on is a bit like asking someone the details of their will. Yeah, the ability to really step in it rather quickly is it's very much there.

And I don't have asked a few people what's in their wills. I think succession, I think it's important. And I hope you hear the uncertainty in my voice there. because I think we somehow occasionally, we need to remember that CEOs are people and people are complicated and people are nuanced and people have their own interests and sometimes those interests aren't aligned with yours as an investor. Yes, that's true, even with the best CEOs. I'm looking at you, Warren Buffett.

And we have to remember that things are complex. And sometimes one of my all-time favorite CEO succession stories is, you know, I'm a very, you is, where were you the day Steve Jobs died? I remember it well. I was in New York at my friend's place, and she said, you know, oh, golf word, exhalated, deleted. She says, oh, blank, Steve Jobs just died. And I go look, and of course, it was after of hours when they announced it, and Apple's stock

price did not react well. I'll put it that way. Except what really changed? You already kind of had Steve Jobs' handpicked successor. was already kind of running the company. Before that, that would be, of course, Tim Cook. And I will argue, Tim Cook has been a much better CEO than Steve Jobs ever could have been post-iPhone. He died in 2011, of course, but the iPhone was 2007. He has been a better CEO than Jobs would have been in a post-Iphone era for investor returns, which of course is an investor

I care about. But on the day that he died, on the day that Steve Jobs died, people very clearly thought, oh, no, this is terrible. This is a disaster. And the world has unfolded very differently from there. So that's why I say, I'm not sure. I think it matters, but I'm not sure. Wait, one second, I want to zero in on before we keep moving. You said looking at you, Warren Buffett. He's been, he's been like pretty good for stock investors, right? He has. And I love Uncle Warren, and I'm going to the Berkshire meeting in a couple of weeks, or by the time this airs, I guess, and next weekend. But one of the succession things that Uncle Warren has put in place is that the chairman of the board, once Warren and Charlie exit stage left, they've already picked

a successor to run the business and also to invest. But the chairman of the board is supposed to be Howard Buffett, who is quote unquote to preserve his son, his oldest son, to preserve the culture at Berkshire. You know, the company he doesn't work for and has shown no aptitude or any kind of managerial, you know, those types of skill set. I'm like, okay, why? Like, why do we need, I mean, you know, not to call Howard Buffett a nepo baby, but he's kind of a nepo baby, right? Like, he'll be, he'll be installed in the, okay, fine, sort of figurehead job. But still, like, you think Warren Buffett would have, would, would, would, would I mean, Warren Buffett, who famously has a long-term relationship with Bill Gates, of course,

founder, former CEO of Microsoft, as well as understanding, you know, during the Ballmer years at Microsoft, not a hell of a lot happened, but then they got, you know, a true rock star, in my opinion, Satinadella, who has taken Microsoft to even greater heights. I don't know. I just, I've never bought into Howard Buffett's going to preserve the culture. That's so funny. That's so funny. You're afraid to call him a Nepo Baby. He's going to be the chairman of the board because of who his dad is.

I'm absolutely calling him a nepo baby. You're saying? Okay. Well, I'm being a little disingenuous there. Fair enough. I'm afraid to call him that, but I'm absolutely calling him that. Yeah. Canna Coke and common sense guy is putting this kid who doesn't run the company at the helm. And in the case of succession, it's not really clear if the kids actually want to run the company. You've had your time. We're getting into spoilers now. Okay, here we go.

Starting generally, watching this season, watching this show, have there been times where you watch it and you go, huh, this rhymes with something I've seen in real life? I generally think that second generation CEOs, second generation taking over, I'm generally not a fan. I'm generally not a fan. Sorry, Howard Buffett. I'm generally not a fan because it's a difficult job, it's a complex job. Why do you think that just because you share some DNA with the previous holder of the position that you will be as good? Roy Disney comes to mind as well.

One of my favorite activist investing stories on that one too. When I look at what's gone on with Succession, the show, first off, I don't know that there's ever, I can't think of a better pairing of writer and actor. to deliver the lines than Kieran Culkin and Roman Roy. I just give that guy all the awards because he's hilarious. But what strikes me and has always struck me with this show, of course, there's four children. There's Kendall and Roman and Chabon and, oh yeah, Connor from the first marriage, who's over there being delusional. But he wants a certain succession, too, if you know the plot lines. These kids are profoundly damaged by their father and the presence and this the scale

of their father of who he is, of what he is built. And I would think, if this were a real corporation and a real storyline, I would be very reticent to have any of them taking over. I think probably Chavon is probably the most qualified. But there's a lot of entitlement in the two, in Roman and Kendall, they feel they deserve it. They, of course, are currently co-CEOes in the show, if you've watched up to kill this, the most recent episode. But there's constant angling for position. There's constant working against each other. There's constant palace intrigue, we'll call it. Kendall, in particularly, is a profoundly damaged human being, in my opinion, who is just looking for Daddy's love.

Again, I think probably the one who's the most confident. And I think the one that Logan, the patriarch of the family, I think the one he probably was closest to and thought could probably do the job best, was Chavon. I look at these characters, and I'm like, I actually think the best thing for investors in the show would be that they, the storyline right now, fools, for those who don't know, that they're in the wake of the patriarchs exit from the stage, they are debating whether to keep the company or sell the company to a Swedish interest. And I'm sitting there going,

oh, no, you sell and you take your money and you go sit on a beach and roll around in your dollars. A Swedish vampire. I mean, I think that's... A Swedish vampire. But I think that makes it more realistic. I think what you said, that the fact that they're profoundly broken, they're not qualified for the job, like in some ways, doesn't that offer more of her similitude to like CEO succession in some cases where the person who gets the job, it's not necessarily because of their skill. In the case of succession, it's because Kendall Roy's name was half crossed out, half underlined, and he was able to capitalize at the right moment.

Even if it's not successful, that's played out before. Yeah. I mean, I've got a couple. I was trying to think before we did this. I was just trying to think of a couple of examples of family succession I've seen. And these companies are both gone now, so don't bother looking it up. The two that came to mind, do you remember Dress Barn? I think the stores might still be around.

I was shaking my head, no. Yeah, I always thought Dress Barn was kind of funny because, you know, hey, honey, I want to buy you something nice. Let's go to Dress Barn. But they were the parent company of several concepts. So Dress Barn, Morise's, Just, which was for younger girls. A couple more. Anyway, they were a fine family-run business. You had the family still owned. It was a husband and wife who'd founded the company. The

husband had passed on. The wife was still on the board. I believe the son was the CEO. So there's your succession, your family succession. And I think the daughter was on the board as well. And I think the family had about 25% of the stock still. And look, it was a niche retailer. It's making the family a few million bucks a year, like what their take home was. was like, that's a decent, that's a nice little life, right? But again, it's the hubris of wanting to get bigger, which might be coming into the TV show succession in the most recent episode especially. But the hubris of wanting to get bigger, Dress Barn, again, they owned Marisa's.

I think they acquired Justice. And then they went out and acquired Anne Taylor. I'm pretty sure it was Anne Taylor and Lane Bryant. Forgive me, fools, if I've misread the name. But then they levered up to go buy these other brands, because we're going to have this, like, you know, a whole suite of brands. And then they had a really big, we're going to do new distribution centers, and we're going to spread out across the country. And they basically leveraged themselves into bankruptcy. They destroyed generational wealth.

The family's stock holdings were nine figures worth. And like I said, they were already, the family was still pulling a couple of. couple million bucks a year collectively, in addition to having those shares. Rather than sell their shares and bank your $100 plus million and just going and sitting on a beach, which I promise you, I would do, they destroyed it. It went into bankruptcy. So that's one I thought was bad. And then another one, since we're sort of in a slow-moving banking crisis right now, Ricky, I figured I'd give you some banking fund. There was a bank called Irwin Financial. It was in the Midwest going into the credit crisis. They had been a big deal. They had paid a dividend and a

growing dividend for a couple of decades, I think, heading into 2007, 2008. The CEO was the fourth generation of the Irwin family. Fourth generation, he always seemed very, a lot more interested in doing good works and appearing on charitable boards and being all over the place. I don't think he was really connected with the business, but because he was the fourth generation, and there was family, there again, there's family wealth. And, you know, he was controlling a trust that owned whatever percentage of the bank. But he was sitting on like 10 or 15 charitable boards and doing good works and all. Things that by themselves are good. But while he was doing that, he was ignoring the fact that the lending standards at his bank had completely gone

off the rails. And so when, then, you know, the mortgage crisis of 2007 through 2009 shows up, long story short, wiped out his business and again destroyed generational wealth, fourth generational wealth here. So I would, you know, if I'm on the board, if I am looking for the trying to pick the successor of Wastarroko, if I'm on that board, I'm like, you know, I'm sitting here going, well, well, anyone but a Roy. Like, no, like, we're not going to, we're not going to go with this Nepo baby succession plan. Yeah, it's the confusion of bloodline for business savvy. And I think you bring up a good point

and maybe we'll be wrong about this, but I could very well see that being the end of the show, which is the destruction of generational wealth. Right now, they're in a position. Gojo's offered them some, I don't know the value of the deal, and I think that's deliberate, but an insane amount of money to take over the entire company. And they're allowed to just walk away. But now you have Roman Kendall's co-CEOs. While they're on the plane there, patting themselves on the back for doing a great job as CEO. Hey, and I think someone reminds them that they've only been at the job for 24

hours. They are also terrible at it. You see them when they walk in with Lucas Mattson in the latest episode, the Swedish tech billionaire, they're getting dogged. They realize that they're not punching at their weight class and that they're going to get steamrolled by

this guy. Yeah. And, you know, ironically the last, again, spoilers, fools. The last scene where Roman just goes off on him on Madsen at the top of the mountain. And it ultimately results in a better deal offered to them. But, you know, the words coming out of his mouth, he's not negotiating. He is letting his bile and his anger and his disgust at the whole process just wash over Mattson.

And then it ultimately ends up in a better offer for his company. And so as you say, they're being all self-congratulatory in the plane over to Norway, and they're looking very happy with themselves. And the way back, they just looked like beaten dogs. And Madsen knows it. And Madsen knows it. And he has Shiv send him a picture. Yeah, it's fantastic.

I think something remarkable about that scene, too, is it's the first time that, at least, as a viewer, I've been confident that Roman was telling the truth. Is it a point where he's so broken that the sarcasm breaks down, the humor breaks down, his language brings down, his language breaks down to the point where he has no other option but to tell the truth. And then even in Mattson in that moment says, you've lost. Like, in telling the truth and saying how you actually feel, you've lost the game, basically. And now I can, now I can beat you.

Thinking of Mattson, though, I want to turn the attention to him and see if, pick your brain to see if we can find some parallels there. This episode, he kind of, he becomes a character. So Lucas Mattson, the Swedish tech billionaire forces the Roy family to come to him in Norway for a retreats, days after the death of their father to negotiate a business deal that could have been a phone call, which is that he wanted them to know that they wanted the cable news network, or the news network ATN, back into the deal. And this is the episode that reveals that Lucas Mattson's a vampire. Physically, he's sending half-leaders of his blood

to the comms director, who's his ex-girlfriend. The actor, Alexander Scarsgaard, was also in true blood, so there's a little bit of an illusion there. the coldness of his character and also his admission that he wants to take AT&T and take Waystar Royco and buy it and strip it for parts. I think those are two of the biggest symbols that it's a vampire storyline. And I think that is also very common in business acquisitions in the publicly traded investment world. It is.

And I'm actually going to go back to the Buffett line as well here, where one of the aspects of the culture of Berkshire, something maybe that Howard Buffett is going to be tasked once Warren is gone, is Buffett famously talks about, if you sell to us, we're not in the business of stripping for parts, of ripping out what we can and maybe selling it in five years. If you sell to us, it is forever. Specifically, if you sell to us, you will get to continue managing your own business. We can't provide new management. So, you know, we're largely going to you know, be hands off. The idea that acquisitions are made and, I mean, the whole concept of a kill list, the title of the episode is when you have two companies, one company acquires

another company and they're meshing two organizations, it's the acquirer builds a so-called kill list, a list of the people they do not, slash will not need at, you know, the combined company. And I mean, and that is the, you know, that is the great problem for a lot of acquisitions. If you are, if you are acquired, I mean, if you're acquired and you've got a whole ton of stock and you're getting a nice buyout, I mean, this could be great. But you're probably going to lose control of your baby and or your job. And if you're fine with that, okay, but a lot of the rank and file, you know, won't. I mean, you know, if you're, you know, you're the corporate treasurer and you're far down the org ladder and you probably don't, you know, your salary,

you need a salary to make your mortgage and eat. Time to bone up on that resume because you're probably not going to have a job tomorrow or the, you know, if one company acquires another company and the sales force, you know, they've each got a sales force. Well, you know, you know who's going away and it's not the sales force of the existing business. So no company needs two CFOs. No company needs two CFOs. I think the one story that might be closest to this show is the story of Louis Vuitton, Bernard Arnault. So for those who don't know, this guy is the, he is the richest person in the world, surpassed, surpassed your guy, Musk, surpassed, who's the other person in the running?

I can't think of it. It was Musk, Bill Gates, but now it's Bernard Arnaud is the richest person in the world, running Louis Vuitton, and he has five children who have essentially been jockeying for the CEO job all of their lives. has made the promise, oh, this is going to be a meritocratic decision. It's going to go to one of them, like, highly educated, trained them to be, like, to be elite business people. And what he did, I think, earlier this year was he just raised the retirement age of his company from 74 to 80 years old. And how old is he? Just so he can play a few more, so he can play a few more seasons. He's 74. Exactly. Yeah. He wants six more years. I wonder why he did it. And that's kind of the case with a

of succession stories, and this was the case in succession where we're going to have this promise that I'm going to, you know, the leader's going to step down as CEO, but we'll see when it actually happens. That's kind of been going on at JP Morgan, too. Yep. And I am going to go back to the show for a minute. And I'm going to go back to the first season because, of course, the show starts with Kendall is the heir apparent. Kendall, I mean, it starts with we're about to coronate Kendall Roy as the natural successor to Logan Roy, played by the brilliant Brian Cox. And basically, Kendall, who again, is a bag of anxieties, frankly. He's completely unsuited for it. And he kind of screws up and dad takes the opportunity

to say, I'm going to stick around again, much like Bernard Arnaud here. But if you go back and watch the old seasons, again, so the two boys or the two younger boys, because again, the fourth child from the first marriage, Conner, is just kind of over in the corner. doing whatever Connor is doing. The boys are enmeshed in the company. And they are, you know, again, they're currying for favor and trying to please Daddy, but also they hate Daddy. And Chauvin is out. Chavon's a PR consultant. She's out. And the way, if you go back and watch those early episodes, the way that Brian Cox talks to her and you can see the affection that he holds her. And now he's still fairly coarse-languaged. And he's still, he's still, he's still

Logan Roy, so he tends to run over everything in his path. But the way he talks to her versus the way he talks to the kids, or to the boys, you can see he actually respects her more than his sons because she's left, because she's gone out on her own, because she's gone and built a career independent of him. Did she surely have the ability to get to get places that you or I couldn't get because she had family connections, of course. But she has, she's very clearly the apple of his eye. The way he interacts with her and what changes is when she comes and works for him, then she slots in with the brothers and becomes just another kind of, you know, everyone.

It's the worst thing that she does personally is to actually come and work for her father, because she loses that autonomy and she loses her father's respect. And it's kind of tragic. Do you think there are any takeaways for investors from the show's succession? I'll give you a couple. One is really quick. I am wary of, you know, the succession plan is based on DNA. I like a true meritocracy.

I want the best person for the job and I don't particularly care where they came from. So, that's number one, and that's very broad. The narrow one, I do have one more example of just something that I'm going to want to avoid. Because, look, most of the time, you don't really see when a CEO transition is coming. And when it comes quite often, like, you know, it's very easy for me to say, Succession, Tim Cook versus Steve Jobs. Tim Cook is a much better CEO than Steve Jobs could have been for Apple. Yeah.

But it's 12 years of experience I can draw on, right, to make that. that assertion. In the moment, you don't know about it. But I am, and part and parcel of that assertion is, I am wary when a CEO makes himself part of the show. And Steve Jobs was very much, for rightly or wrongly, very much part of the show. Tim Cook likes to stay in the background. And another example I'm going to give you here is what I call the dueling bobs, okay, at Disney, Bob Iger, Bob Chapic. Bob Iger absolutely makes a lot of himself part of the show. He has so much power, and he did the whole, oh, all shucks, you know, I mean, I'm going to, he was doing that for years before he actually left in 2020.

Then his handpicked successor, Bob Chepec, comes in, and he's almost immediately and constantly undermined by board member Bob Eiger, former CEO Bob Eiger, right? And, you know, he's blamed for stuff. I will note that Disney hit its all-time. share price high under Bob Chapic. I'm just going to put that out there. But, you know, Iger is constantly, you know, undermining him, even though, you know, the world is upside down. Their parks are closed due to COVID. Everything is just off kilter completely. He's inherited the debt associated with the Fox acquisition, which was made under Bob Eiger. He is inherited, You know, what I, you know, I'm of the opinion, most streaming services are going to basically provide value to subscribers and no value to companies.

Sorry Netflix, sorry Prime. And Disney Plus, by all accounts, is losing money, right? Because he inherits that. And so he's just beset on all sides. And he even got the wonderful stamp of approval from the board. Which, I mean, at that point, I hope he started his eyes or made polishing it up. But he gets the stamp approval from the board, I think, about seven or eight months before Bob Eager knips him in the back once the pandemic is largely over and he can reassend.

And then Bob Eager almost immediately starts like, oh, shucks, I'm not going to be here that long. Yeah, okay. If I'm the CEO candidate for the next time Bob Eiger is wanting to leave, and I am not, but if I was one of the potential candidates, I would have my employment contract drawn up where I get a billion dollars if Bob Eager sets foot on Disneyland Park ever. Like, you can't trust the scenario. You might as well just give it to Eiger until he dies because no one's going to trust him. And so you've now got this kind of Fiat state run by Bob Eager. And I think that detracts. And look, Disney's share price returns have been mediocre for years, frankly, which is bizarre for a company that owns

childhood. So I just tell me I'm wrong. I think one reason you're not going to be the C.E. is the promise that the streaming service will never, ever make money. But no, I see what you're saying. I think something that Iger and Jack Welch actually have in common is that there might have been a deliberate, and I'm saying May, possibly, who knows, a deliberate almost sandbagging of the replacement where you don't want the next person because no one can do the job quite like you can. Exactly.

So whether it's Jeff M.L. Bob Chapeck, they come in as the handpick successor from the CEO, and there may be a subliminal knowledge from that person that it's not going to run as well as it could under meet because that's impossible. Yeah. And I will also note that, of course, Jack Welch managed to not just blow up GE with Jeff Melt in the background, but he kind of did a deal on Home Depot too, right? Because Bob Nardelli, who lost out on the GE job, goes to Home Depot and just was brutal there for years and only after he was ousted, which I think was early 2007, and no tears for Bob

Mardelli, you got a quarter billion dollars to go away. But only after he was ousted, did Home Depot just turn into this fantastic cash generating engine that it has become. I get, you know, like, I think the stock is, I'm going to make up a number. I think it's about 320 bucks today, ballpark. I have very fond memories of Home Depot. You could have bought Home Depot. Have you heard of them? You know, they're in one or two cities around North America. You could have bought Home Depot for like, you know, $19 on the, in the wake of Bob Nardelli's exit, which to me is just fascinating. It's so much value is created.

But, you know, again, Bob Nardelli, candidate for GE, lose out in GE, goes over and tries to apply the GE method at Home Depot and fails miserably. And I think that's another lesson. It's just because you might have come from a system that has a much vaunted CEO, I'm not sure that you go to a different culture, a different company. It's going to translate. It might, in fact, just explode. 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.