Mitchell and Company - Management Consultants

Charting the CEO 100 Index
1993

How CEOs Significantly Impact Shareholder Value

Investors who placed their bets last year on companies with top-performing CEOs notched gains that doubled those of the S&P 500. Emboldened by success, the management expert who crafted the strategy takes another shot.

A year ago, I proposed a new investment strategy, and it reaped handsome returns. The Chief Executive CEO 100 Index--a compendium of companies with outstanding leaders making the right moves--grew 10.3 percent in 1992, while the S&P 500 Composite Index advanced 4.5 percent. The double-digit return also would have placed the CEO 100 ahead of more than 80 percent of professionally managed portfolios.

The new index first ran in the September 1992 issue of Chief Executive. It consisted of 100 top-performing companies (among 800 we considered) with one CEO in place between 1989 and 1991. My hypothesis, that "investors who buy shares of all the companies on the CEO 100 will reap gains superior to those of the S&P 500 or other major stock indexes," was correct. The trend continued in 1992.

Thus encouraged, I put forth a revised CEO 100 Index. The criteria for inclusion were expanded to include CEOs of companies with an equity market capitalization of $500 million or more at year-end 1992. Again, we examined only companies with the same CEO in place for three years -- this time between 1989 and 1992. Using this test meant that several thousand companies were considered, compared with last year's 800.

Because 1992 was a terrific year for small-cap stocks (total capitalization under $1 billion), this new method produced an index that jumped an eye-popping 330 percent, while the S&P 500 increased 24 percent. If history repeats itself, my index should again outpace the S&P 500, rewarding those who invest in all of the CEO 100 companies.

Because of the expanded selection criteria, only 10 of last year's 100 CEOs made the list this year.

The new CEO 100 leaders (see chart) are Charles Mathewson of International Gaming Technology (gaming machines), Michael Dell of Dell Computer, James Smith of Healthcare Compare (medical cost management), William McGuire of United Healthcare (HMO), and Lawrence Probst III of Electronic Arts (entertainment software).

Other top performers are Cabletron Systems (computer network hardware), Amgen (biotechnology), Vencor (hospitals), Parametric Technology (software design), and Synergen (biotech).

As stated last year, there are several reasons the CEO has a significant impact on shareholder value. To recap, the CEO decides how important stock-price growth is as a goal. (Many companies put customers, employees, and independence ahead of shareholder rewards.) CEOs also vary in their approach to increasing value and stock price. Many are still of the school of thought that holds "expand earnings per share and cash flow, and the market will reward you." Others bolster value through increased service and cost reductions.

Moreover, some CEOs are adept at driving the company forward operationally. Consider widely respected Raymond Noorda (Novell) and Bernard Marcus (Home Depot).

As an alternative, you can bet on the underperforming or new CEO. Undoubtedly, some will do well, but investment success under such an approach would be more of a hit-and-miss proposition. Some "best bets" include BMC Software's Max P. Watson Jr. (mainframe systems software), Olsten's Frank Liguori (temporary help), and Washington Mutual Savings Bank's Kerry K. Killinger (thrift).

Donald W. Mitchell is chairman and chief executive of Mitchell and Co., a financial and management consulting firm in Waltham, MA. He is also chairman and CEO of OUTSTANDING CHIEF EXECUTIVE OFFICERS and SHARE PRICE GROWTH 100 , collaborative research organizations directed by leading executives and their companies, including many of the CEO 100.

© 1993 Copyright Chief Executive

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