05 October 2013
Lou Simpson Speech at Ohio Wesleyan 10/3/2013
Speech Title: Corporate America: To Rent or Own?
Please note that I’ve tried my best to come as close as possible to what Mr. Simpson said during his speech but I only took notes and did not conduct a word for word transcription.
When looking for companies to buy determine if they care about long-term profits as a lot of forces make CEOs focus on short-term.
1. Most CEOs are focused on empire building. Bigger is more important. M&A record is mediocre at best with a good percentage of them result in value destruction. They get paid more as business gets bigger. Some CEOs are just deal jockeys.
2. CEOs are focused on short-term EPS and revenue growth. When CEOs say to him that an action they wish to take will create value he tells them that they need to create value on a per-share basis.
3. Lots of noise and self promotion in terms of executives on CNBC and attending conferences where they try to sell stock like selling pizza. “If you do a good job running the company the investors will find you.” He thinks you will only find people who want to rent your stock by attending conferences and that you will get a better class of shareholders by running the business in the right manner.
4. Accounting issues. Lots of noise in earnings, GAAP is meaningless as a result of continuous one time charges. He prefers to focus on the cash flow statement.
Good businesses, those earning a good return on capital, low capex, and can invest cash flow or give it to shareholders in efficient manner.
What are good uses of cash?
1. Increase Dividends
2. Buy stock below intrinsic value
3. Pile up cash (generally not smart)
4. Reivest in current business which should be first priority.
Focus on companies looking to buy back stock.
What really bothers him is when CEO and senior management own no stock. Options and restricted stock do not count. He feels they shouldn’t receive stock if all they do is sell it and not become owners.
He told a story about a company that recently did a bond offering. Buying back stock like crazy. Lou and CEO are the only ones who own lots of stock. He is chairman of the compensation committee (I’m fairly certain this is Verisign which is a company I own).
Other Management Issues
1. Lots of turnover. Pressure on CEOs to hit home run right away. HP is example of a company that gone to outsiders for management and it has been a disaster. He said it was once a great company and who know maybe Meg Whitman can turn it around.
2. Wall street focuses on company earning numbers and exceeding guidance expectations. He stated he is not a fan of guidance. He didn’t say this but my impression was that CEOs pay too much attention to Wall Street and this is one reason for their short-term focus.
Root of the problem is instant gratification. An example is mutual funds in that they advertise short-term performance. People who buy mutual funds are even worse as they focus on hot funds. At this point he spoke highly of Peter Lynch’s track record as a fund manager and commented even so most of the investors in the fund lost money by buying high and selling low.
Most investors are greedy when they should be fearful and vice versa.
He recommended the book The Outsiders by William Thorndike. The book should people who thought like owners and were able to create a lot of value. The place he is still on the board sent the book to everyone (board and senior management). As I mentioned before I believe he is referring to Verisign.
How to invest:
1. Try to find fine businesses
2. Try to find businesses that could be run by idiots
3. Find people running company that think like long-term owners
4. Find businesses that reinvest back in the business when necessary
5. Willing to send excess cash to shareholders in most efficient manner
6. Find people who are tying to grow long-term value on a per-share basis.
7. Managers who own stock (said he looks very carefully at the proxy statement)
8. Look carefully at compensation structure
9. Culture is very important but management must not just talk it, they must live it.
(The microphone was not working properly so I was unable to write down the questions asked)
He replied that options have a place but need a longer time horizon. Spoke against option repricing.
He replied in response to a question that corporate America is over-regulated and its hurting America even though we still overcome this issue.