If you're building a company today, here are 6 things Jeff Bezos knew back in 1997 that made Amazon (and will make you) so successful.
Read the full post in Forbes
By Eric Jackson Amazon's stock has been on a roll since it released its earnings back in October. The stock jumped from $93 to $114, at which point many investors said the stock had got ahead of itself. I remember one investor who exited after the earnings announcement, who tweeted, "I love the stock but it's now at crazy levels." It's gotten crazier. That good momentum carried it through the holiday shopping season and beyond. (Question: If we all continue to increase our buying online vs. in-store every year for another 10 years, can we still call the shift a trend -- or will it be a natural state?) The stock hit $140 a few days after Christmas; it's now off 10% from those levels.
RealMoney Contributor
1/21/2010 1:03 PM EST
With the coming of Apple's (AAPL - commentary - Trade Now) tablet next week, what's the short-term impact on Amazon's (AMZN - commentary - Trade Now) stock price? The short answer: Not much. The longer answer is it might be a good time to re-enter the stock.
07/07/09 - 09:11 AM EDT
AMZN , JNJ , BRK-A , C , GE , IBM , GIS
Eric Jackson
It seemed an easy-enough question last week when someone asked me: What's the company in America with the best corporate governance? Yet, in trying to answer it, I was sent on a frustrating journey and a disappointing conclusion that there's no obvious winner. However, I'll name three good companies and look to address why it's so tough to answer the question.
In preparing this article, I reached out to some of the people I most respect in the world of corporate governance today: consultants, writers, bloggers, corporate secretaries and academics. Most of them were stumped by the question of what company is the best when it comes to corporate governance. It's certainly much easier to list 20 companies with bad governance for every company with good governance, which says a lot.
But three really good ones are Berkshire Hathaway(BRK.A Quote), Amazon.com (AMZN Quote) and Johnson & Johnson(JNJ Quote).
I'll revisit them later after I explain how I arrived at my conclusion.
To help spark my thinking, I searched the Web for recent corporate rankings of the best boards in corporate America. I came across a list from BusinessWeek from 2000. The top board on the list was General Electric (GE Quote), which unseated Campbell Soup(CPB Quote). Others near the top were IBM(IBM Quote), Home Depot(HD Quote), Intel (INTC Quote) and Cisco(CSCO Quote).
Since this ranking was issued, the combined stock returns of this group has been down 60% vs. negative 37% for the S&P 500. Three of the worst boards in 2000 in the rankings -- Walt Disney(DIS Quote), Rite Aid (RAD Quote) and Waste Management (WMI Quote) -- actually have slightly outperformed the best boards in the nine years since, but still returning on average negative 54% .
Ten years ago, GE's board was lauded for having a high number of outside directors who owned large amounts of stock in the company, which is worth 77% less today than it was back then. The board's largest move since 2000 was appointing Jeff Immelt as Jack Welch's successor rather than Bob Nardelli. It's hard to fault the board for that pick, given Nardelli's travails since then, but GE's shareholder base was frustrated with the stock's flat performance for the majority of this decade -- and that was before the wheels fell off last year with the concerns about GE Finance and its commercial real estate holdings.
Campbell Soup, the No. 1 corporate board of 1999 according to BusinessWeek, has lagged its peers like General Mills (GIS Quote) and Heinz(HNZ Quote) for a decade and barely treaded water with the S&P 500 over that time. Its stock is down 30% from 1999.
Finding the link between governance and performance has often vexed academics researching the link. At larger firms, with so many moving parts, it's often difficult to find the long-term performance effects of, say, separating the chairman and CEO roles.
''You are never going to be guaranteed total success,'' says Charles Elson, head of the Weinberg Governance Center at the University of Delaware. ''But good governance gives you protection when things go wrong. In the long run, that will play out.''
I spoke to Elson last week about the problem which many governance ratings have had in subsequently predicting company performance. He told me, in his view, that there were two critical governance factors which clearly showed a relationship to performance: (1) equity ownership of directors and (2) independence of directors.
I think he's right. Back in 2000, I was involved in a major research project which sought to link governance-related factors to subsequent company performance. The one factor which stood head-and-shoulders above any other was director stock ownership. And, by the way, owning stock through stock options or stock grants (the equivalent of "found money") didn't predict future company performance compared to when directors actually dug into their own pockets and purchased stock.
Board "independence" has been talked about often since the Enron and Worldcom scandals. We take it for granted that having a board stacked with family members or lawyers, accountants, and consultants who are paid by the company as directors is likely to produce more rubber-stamping boards than ones with more independent-minded people. However, there's still a lot of work to do in linking specific types of independent directors and company performance.
For example, I strongly believe having an independent director with industry experience is going to be more valuable in the long run compared with an independent director without that experience who doesn't want to speak up for fear of looking like a fool in front of the group. I also think too many boards lack diversity, in terms or ages, backgrounds or tenure on the board, which makes them collectively less independent thinkers than boards with such diversity. (However, adding a director for diversity's sake, without required business or industry experience, won't result in any new benefits for the group because such directors, again, will likely be too afraid to speak up.)RealMoney.com: Investing
By Eric Jackson
1/28/2009 11:45 AM EST
The bestselling author of Why Smart Executives Fail, Sydney Finkelstein is Steven Roth Professor of Management at the Tuck School at Dartmouth College. His upcoming book,Think Again: Why Good Leaders Make Decisions, coauthored by Jo Whitehead and Andrew Campbell and published by Harvard Business Press, expands on why companies run by sharp executives run off the rails.
After discussing the main themes of his new book and how they relate to the current market environment, we moved on to translating his research on executive and board decision-making into tangible investment ideas.
Jackson: What are examples of corporate leaders who make smart decisions and whose companies would make good long bets?
Finkelstein: I'll start with Jeff Bezos of Amazon (AMZN - commentary - Cramer's Take). That's a company that keeps on going even though no one gave it much of a chance in 2001. Remember that he had the foresight -- or good luck -- to tap the debt markets for $1 billion. This helped Amazon weather the storm after the Internet bubble burst. He's made his strategy work and he's innovative in ways that are complementary to the core business.
This is anecdotal, but I've had so many people ask me if my new book is coming out on Kindle. (Editor's Note: It is.) They've told me they wouldn't read it unless it did. Bezos has had a strong vision for what he wanted the company to be and stuck with it. He experimented with offshoots to the core business without getting too far afield. He also surrounded himself with good team members who appear to have been unafraid to challenge him.
Jackson: People worry about Amazon's high valuation.
Finkelstein: I'm not a valuation expert, I'm a leadership expert. However, I do know that good leaders do the necessary things to keep growing their businesses in sustainable ways. For that reason, I think Amazon is a good pick.
Another great corporate leader is Sandy Cutler at Eaton (ETN - commentary - Cramer's Take)(ETN). He's a Tuck grad, so I've had the chance to meet him several times at the school and he's always impressed me.
I haven't met anyone more knowledgeable about M&A. He knows how to integrate a company, how not to overpay. He's built a very strong organization around him. He always demands a good debate from the executive team. He also wouldn't be comfortable with me singling him out alone; he would always credit the team. Eaton's stock is down by half in the last year, but it's ahead of many peers in the market.
Google (GOOG - commentary - Cramer's Take) has also done a good job. It has one business that makes money and 29 that don't. A bunch of these that don't make sense have been jettisoned. Google is growing up. It was fine to experiment when times were flush, and you want to keep talented people around. Now it's being serious and cutting and not hiring.
New CFO Patrick Pichette seems to have done a good job here. No one could believe how well Google put the brakes on costs in the last earnings call. Capital spending dropped by half of what was spent a year ago and only 99 people were hired last quarter, down from thousands in past quarters. The company appears to have an excellent management team: It's not just Eric Schmidt, Sergey Brin and Larry Page. Shona Brown is also very strong.
Lastly, I'll mention General Electric (GE - commentary - Cramer's Take) and Jeff Immelt, even though the stock has been savaged. He was dealt the toughest hand you could possibly be dealt for an incoming CEO: following the most famous CEO ever, as well as dealing with Sept. 11 and the general stock market decline that followed. He's focused on some important themes: globalizing, going green and continuing to develop talent. He's controlled what he can control.
Jackson: Let's shift to examples of CEOs doing the opposite of what you advise and which companies, as a result, would make good short candidates.
Finkelstein: I'll start with Ken Lewis at Bank of America (BAC - commentary - Cramer's Take). It's amazing to me that he still has a job. Lewis cut his teeth as a credit analyst under Hugh McColl at North Carolina National Bank, later overseeing the bank's aggressive acquisition strategy. He got the top job in 2001 -- most people thought Lewis would be less acquisitive than McColl, but it has been just the opposite.
This is going to sound a little like armchair psychology,but for Lewis to be a major success at BofA, he knew he'd have to surpass McColl, already a legend in Charlotte for growing the bank into such a global powerhouse. How do you do that? You've got to make acquisitions and grow this bank even bigger. In 2003, he bough FleetBoston Bank for $48 billion. He bought MBNA in 2005 for $34 billion. And in April 2007, he bought LaSalle Bank for $21 billion.
He followed the Citigroup (C - commentary - Cramer's Take) failed "financial supermarket" strategy. Then BofA took on Countrywide for $4 billion and Merrill for $50 billion this year, with all the ticking time bombs in their portfolios. You're looking at another Citi. Lewis has been overly attached to his image of needing to be better than McColl.
There's another aspect to Lewis that relates to what we discuss in the book: He based his decision-making in 2008on misleading past experiences. BofA was built on many small bank acquisitions. McColl would cut costs and look for revenue enhancements, which gives you greater market power and heft. It's a great model, on such a different scale than Fleet, MBNA, Countrywide and Merrill.
Lewis thought -- based on Fleet and MBNA -- that he knew how to do these big acquisitions. He didn't. The due diligence was shockingly short on Merrill. This was a trophy acquisition. Reports are that Lewis wanted this jewel for a while. If the stock goes up, I would look to short it. I would bet there are more skeletons in their book.
Staying with financials, when you think of what Citi was and what it could have been, it's a tragedy. Citi has been incredibly slow to face up to problems. It took far too long to replace former Chair Sir Win Bischoff. There were rumors that he was on his way out for months. Dick Parsons appeared to be the de facto chair anyways, so what was holding Citi up?
It's also obvious that Citi moved too slow to break up the company. It's only been done begrudgingly and probably at the insistence of the new owners -- the U.S. government.
Vikram Pandit is a disastrous CEO. It's a tossup if he's worse than Charles Prince. You really wonder where was the board in all this? Why are most of the directors still there after making two terrible picks? When you think of the job of a board of directors, its most important job is hiring the CEO. Citi's board has failed twice now in this most basic function.
How they picked Pandit is a story in itself. He ran a hedge fund that seemed to be successful, but a year later Old Lane proved to have made many terrible bets. The performance plummeted, redemptions were through the roof and Citi needed to inject it with capital to keep it going. It has since been shut down.
Pandit was picked because basically any other senior talent in the company had been driven away months and years earlier. Pandit's been in way over his head from the start.
The lesson from Citi is: you've got to face reality immediately and move on. And for the board, the lesson is: you can't be attached to the CEO you pick. Your attachment can blind you to what's going on. Until there are major CEO and board changes, Citi is a short.
Finally, Jerry Yang at Yahoo! (YHOO - commentary - Cramer's Take) clearly made a number of poor decisions as CEO. First of all, he had an inappropriate attachment to Yahoo! from the beginning as a cofounder. From the outside, it also appears that he (and others on the management team) were very much against the idea of selling to the "evil empire" of Microsoft. As a result, he left $30 billion on the table for his shareholders.
Even now with Carol Bartz, about whom I've heard a lot of very positive things, I wonder whether Yang would approve a deal if it came along.
The other major problem with Yahoo! -- even more important, in fact -- is the tired board. It didn't pay any attention to Terry Semel, except when it came to approving his monster pay packages; let Yang be CEO when he wanted to instead of doing a thorough search; and let the company go through countless reorganizations with no results and no accountability.
How can you expect the rest of the organization to be accountable when no one on this board has been accountable? Even if Bartz is exactly the right CEO, she's going to be saddled with one of the worst boards in corporate America. What shocks me the most is that Yahoo!'s largest shareholders sit back and except this. They are gluttons for punishment.
