INTELLIGENT BUSINESSLIKE INVESTMENT

The following story was told in an article this week in the Financial Times.

A shepherd is tending his flock when a Jeep screeches to a halt beside him. The driver hops out and says: "If I tell you how many sheep you've got, will you give me one?" The shepherd looks him up and down. "OK", he shrugs. The stranger takes out his laptop, plugs it into his mobile phone and, after a little work involving Nasa websites and satellite readings, says: "The answer is 931." The shepherd nods. "Choose your sheep", he says. The stranger bundles the animal into his Jeep.

"Now", says the shepherd. "If I tell you what job you do, can I have it back?" "Sure", the stranger replies. "You're a management consultant", the shepherd says. "How did you know?" the astonished stranger asks. "Easy", the shepherd says, "First, you charged me a fortune. Second, you told me something I already knew. And third, you know nothing about my business. Now please give me back my dog."

The article then goes on to explain how to be as good a management consultant as Michael Porter. However, nowhere does it suggest that you must actually know a lot about the subject at hand. This strikes at the heart of the problem, not only in management consulting but also in equity analysis. The issue is frequently that of form rather than substance. Get an item to look the part and people will purchase it, never mind the fact that the moment you tap on it, it will immediately be revealed as hollow inside. Luckily for most fraudsters, the financial world is in such a rush (to only God knows where) that it never stops to tap. Instead of concentrating on delivering value and producing something to be proud of, the emphasis is on producing something that will look the part long enough to enable management to get away with it (e.g. Enron et al). We would surely not have the privilege of the pyramids, the great cathedrals of Europe or the Tower of London today if that attitude was always prevalent.

The above grievance of mine is something that the regular readers of this letter will be familiar with. However, my research on a top-notch company over the last two weeks sparked the urge to bring it up again. These folks run a company in a very drab industry, but man are they good at what they do. You won?t find any management consulting jargon here. However, a management consultant or equity analyst would do well to try and learn something from these guys. The company is simple and understandable. It is run by outstanding management that have been with the company for a long time and have a significant amount of their own money invested in the company. The company has been growing for years at an unbelievable pace and, by "growth" I mean real growth or organic growth. Not this "growth by acquisition" stuff that companies like Cable & Wireless Plc try to pull off. Now, why do I smell the hand of management consultants somewhere in there? Anyway, the same-store net revenue growth was 7% in 2001. The slowest it has ever been, according to my knowledge. Operating profit grew by 13%. The company is focused on producing what counts, namely cash. It mostly produces cash earnings well in excess of its reported net earnings. Unlike most companies, which will massage the numbers to the point where it gets laughable just to meet analysts? expectations. You can?t help to think about who is running companies these days - management, analysts or consultants?

To give you some idea of the calibre of people we are dealing with, see their response to a question whether it was true that the CEO paid for his parking out of his own pocket, despite the fact that the company owned the building:

?We have been asked several times to verify that our Chairman and CEO Peter Rose actually pays to park his car in our headquarters building ? which is 100% owned by Expeditors. The answer to the question is yes, Peter Rose pays for his own parking ? just as he pays his own utility bills and uses his own funds to buy clothes, groceries and his tickets to Seattle Thunderbirds hockey games. Frankly, it continues to amaze us that this would be viewed in any way as "novel".

Call us naive, but long before corporate governance became trendy, we just assumed that personal expenses should be paid for by personal funds and corporate expenses would be paid for with corporate funds. While we realize that many of the "talking head" CEOs, whose names are mentioned in hushed tones on Wall Street and on university campuses, would find our philosophies rather provincial; we have always believed that mixing business and personal expenses causes a form of blindness that results in an inability to put the interests of the shareholders first.

Actually, one of the best illustrations of this part of the Expeditors culture is not about Peter paying for his own monthly parking, rather it is the dinner party catered at Mr. Rose's new house in October 1998. The guests were all the members of senior management who were in town for a semi-annual meeting. Anyone who knows Peter would expect him to host a first class event and they would not have been disappointed. From the sterling silver, china crystal on the tables to the large heated tent erected over his new lawn (this was Seattle after all and October can be a little cold at night and likely "wet"), no shortcuts were taken. The entire cost of the event, soup to nuts, was paid for by Mr. Rose out of his own pocket. Nothing was charged to the company. While this could have been a company expense, given that it was a company event, it wasn't for a couple of reasons. Our policy is that if you invite co-workers (like guests from other countries) to your home for dinner, you pay and you don't claim reimbursement. In your home, the visitor is your guest ? not the Company's. Another reason, is that shareholders, and we're all shareholders around here, don't need to foot the bill for the excesses that you might want to provide for a party of close friends.

From a pure social observation, it seems to us that the most effective poster child for raw, vulgar, and unrestrained corporate greed is the multi-million dollar-a-year CEO who is too mean, self-entitled or greedy to pay for his or her own personal living expenses. Don't get us wrong, we have no problem with management being justly compensated for improving the net worth of the shareholders in whatever format the shareholders agree. However, it seems that recently many companies not only employed their CEO's, they apparently adopted them as well. This behavior fuels the argument that many CEO "did it once for the shareholders and twice for themselves" and specialized in taking their half out of the middle. We think adoption is best when limited to children in need of support, nurturing and a stable home. It is unconscionable when extended to the corporate CEO caught up in the never-ending quest to satiate egos with the shareholders money. To borrow from Mr. Rogers "Can you say greedy, self-absorbed kleptocrat?"

As a side note, the parking garage in our corporate office, like all our branch offices, is a separate profit center. We use the same incentive bonus system to motivate and reward the people who must valet park cars in our tight and post filled garage as we do in each of our branches. The interesting thing is that our garage is a financial success and it isn't just because we have a captive audience of tenants in our building. Our people hustle, they share in the profits and they are very aggressive about reacting to changes in market conditions and maximizing market share. The interesting thing is that the bonus appears to have expanded the number of cars we can park in the garage as to our knowledge we have yet to turn away a single car nor have we as yet ordered a "garage full" sign.?

Every month Expeditors International publishes the questions (and their answers) it was asked during the month, mostly by the professional investment community (The information is filed in form 8K with the SEC). What is striking when you read these filings is the contrast between those who live in the world of theory and those who actually get down and do the dirty work. They seem to be separate cultures, existing worlds apart. Month after month some twit will come along from some very upstanding investment bank or consultancy and ask questions like, ?What will your earnings be in 2002 and 3002?? In a nine-word sentence this guy couldn?t even get his dates right, or even bother to reread his sentence.

Month after month someone will ask some question about the Company?s activities in China. And, month after month Expeditors International has to point out that, ?Hello! China is not a single country!!!? There are two Chinas - the People?s Republic of China (?China?) and the Republic of China (also known as Taiwan). This might seem pedantic but for a company operating in both countries questions about ?China?, which might seem intelligent, sound downright stupid (especially if it has to correct the mistake on a monthly basis). Numerous questions are asked that make it very clear that the person did not even bother two read the 10K?s or the 10Q?s (annual and quarterly reports). Now, please would someone tell me how it is possible to have an even semi-intelligent discussion with management if you did not bother to read the company?s annual report?

The contrast between the culture of management and the culture of the financial community is striking when you read Expeditors? 8K?s. The management of Expeditors are straight-talking, no-nonsense people who do an honest day?s work. On the other hand, the questions Expeditors receives from the financial community every month show the analysts and investment bank ?experts? up as an ignorant and arrogant bunch that are not even half as intelligent as they think they are.

My conclusion is this. If you are going to take up the time of a company?s management, please have enough respect to at least do your homework beforehand. Otherwise you are an embarrassment to those in the financial community that actually try to create something that not only looks the part, but also lives up to what it purports to be. Try creating value for a change, not illusions of value.

Whatever you are up to, I hope it is profitable and ethical!

Mr. B

mail_mrb@yahoo.com

Posted: 2003/02/10 07:38 View Archive