This Is When to Worry About Your CEO
There are a lot of things we could say about former MF Global (OTC: MFGLQ) CEO Jon Corzine. If we were to ask thousands of former MF Global customers -- who, as a group, are missing $1.2 billion after the broker's epic collapse -- most of those things probably wouldn't be fit to print on a family-friendly website like The Motley Fool.
However, there is one thing we can say for sure and don't have to censor: Jon Corzine didn't need MF Global.
As a former chairman of Goldman Sachs, a former U.S. senator, and the former New Jersey governor, Corzine had an impressive resume that could have opened any number of doors for him -- most of them plenty lucrative and not terribly challenging on a day-to-day basis. Corzine was also already a very wealthy fellow. He had enough to spend roughly $100 million financing his political ambitions and according to OpenSecrets.org, he was the third-richest senator in 2005, with a net worth that may have been as much as $250 million.
To reiterate, if Jon Corzine's path had never crossed MF Global's -- heck, if Corzine was never a CEO, chairman, or other key executive anywhere ever again -- the 64-year-old would have likely lived out the rest of his days very comfortably.
There are a lot of directions we could run with this, but what I want to focus on is what stock market investors can take away from it.
Just one metric
Back in 2009, Fool co-founder Tom Gardner wrote an article titled "How I Find Great Stocks." Right at the outset of the article, Tom wrote something that really stuck with me. He said that if he had to choose just one metric to base his investment decisions on it wouldn't be growth, price-to-earnings ratio, return on equity, or balance sheet cash. Here's what he wrote:
The metric is straightforward, easy to find (just look at a company's 14A filing), and it doesn't require any math or investing experience to interpret. You'd be amazed by how closely correlated it is with stock market success, and yet it is still overlooked by the majority of investors. You MAY have guessed it ... my metric of choice is insider ownership.
How did Corzine stack up on this metric? At the peak of his ownership, Corzine had $3 million invested in MF Global, which equated to roughly 0.24% of the company's outstanding shares. To put that in perspective, for somebody with a more modest $250,000 net worth, that ownership stake would equate to around a $3,000 investment. That's certainly enough to be bothersome if lost, but hardly the type of investment that would cause our fictional investor to be especially cautious and conservative.
But it goes even further than just the money. Beside the fact that his buddy Chris Flowers' investment fund had an investment in MF Global, Corzine didn't have any strong connections to the company. He didn't found the company, nor did his family. He didn't come up through the MF Global ranks. The futures business wasn't even what Corzine focused on when he was blazing a trail through Goldman Sachs. In other words, Corzine was simply a hired gun who had the opportunity to make some money and burnish his reputation without really putting much on the line.
Into the scrum
So how can investors use this in choosing stocks? Building on what Tom said in his 2009 article, it's a good idea for investors to evaluate who's running the company in question and what they've got on the line.
On the one hand, with a CEO who founded the company and has most of his net worth tied up in his ownership stake, there's a much higher likelihood that the decisions he or she makes will be with an eye toward outcomes that all shareholders can cheer. On the other hand, a hired-gun CEO like Corzine who doesn't have any ties to the company, or much to lose, should bring extra scrutiny from investors.
To illustrate what these two situations look like, here are three companies whose CEOs I would be more comfortable trusting.
- Berkshire Hathaway (NYS: BRK.B) . OK, perhaps this is a gimme, but we hardly want to overlook one of the greatest corporate, investing, and managerial stories of our generation. Berkshire CEO Warren Buffett not only owns 22% of the company -- which equates to a cool $42 billion -- but he's also the architect of the company that built it from a failing textile manufacturer to a powerhouse conglomerate.
- ArcelorMittal (NYS: MT) . Lakshmi Mittal owns 41% of steel giant ArcelorMittal and was the force behind building it into the world's largest steel producer. Obviously this isn't a passing fancy -- Mittal's name is on the company and he's a steel man, plain and simple. Mittal is a fantastically wealthy individual who loves to throw his money around, but his near $9 billion stake in ArcelorMittal means that he's got a lot on the line.
- Wynn Resorts (NAS: WYNN) . CEO Steve Wynn owns 8.1% of Wynn Resorts, which is currently worth more than $1 billion. Steve Wynn is the founder of Wynn Resorts, a longtime Las Vegas Strip developer, and like Mittal, named the company after himself. For Steve, there's a lot riding on the continued success of Wynn Resorts.
On the flip side, I'd be more wary of the head honchos at the following companies.
- Hewlett-Packard (NYS: HPQ) . Meg Whitman's name may sound great to some given that she made a ton of money running eBay for many years. But Whitman's experience is consumer and retail -- eBay is very much a retail company and she was at companies such as Hasbro, Stride Rite, and Walt Disney prior to eBay -- so I'm not exactly sure what qualifies her to run a tech giant like HP. Whitman has no history or ties with HP and other than the stock and options she was handed for signing on with the company, she owns all of 66 shares of HP stock.
- General Motors (NYS: GM) . Perhaps GM needs a fresh perspective for a new direction. But call me a skeptic when it comes to Daniel Akerson. Akerson has executive experience -- including top executive spots at MCI, Nextel, and XO Communications -- but nothing even vaguely related to autos. He came to GM directly from the world of high finance as a managing director of The Carlyle Group. And though Virginia Business estimated his net worth at $190 million, he currently owns just $3.5 million in GM stock, or about 0.01% of the outstanding shares.
MF Global may have already succumbed to its epic flame-out, but you can still dig in to the stocks above and determine whether their CEOs are incentivized to run their companies in a sensible, shareholder-friendly way.
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At the time this article was published The Motley Fool owns shares of Berkshire Hathaway and ArcelorMittal. Motley Fool newsletter services have recommended buying shares of Walt Disney, Berkshire Hathaway, Hasbro, The Goldman Sachs Group, eBay, and General Motors. Motley Fool newsletter services have recommended writing puts in eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway and ArcelorMittal but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.
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