When I read about Uber’s most recent financing, which valued its equity at $51 billion, I thought about FedEx Corporation, a Memphis-based company. I then wrote a blog post titled Uber Market Cap of Equity Exceeds that of FedEx. This past week, my thoughts about FedEx turned towards AutoZone, another Memphis-based company, as well as to a few private companies, as well.
AutoZone was founded in 1979 by J.R. “Pitt” Hyde, III (now 71). FedEx was founded by Fred Smith (now 70) in 1971. FedEx revolutionized the movement of information, and AutoZone became the largest player in the self-help auto parts movement. The juxtaposition of AutoZone and FedEx led me to think about the potential importance of management transitions in companies.
Management Transitions are Important
In my book, Unlocking Private Company Wealth, Chapter 18 is titled “10 Thoughts on CEO Management Succession for Private Companies.” The thoughts include the following:
- Transition before it is necessary
- Transition before you are ready
- Link leadership development with succession planning
- Succession planning is a risk management function
- Develop a succession plan and don’t wait on events
Too often, owner/managers of private companies hold onto the reins for too long. This propensity deprives younger managers the opportunity to make their mark and the companies do not gain their energy, enthusiasm and leadership in top spots.
Management transition is important because it rejuvenates leadership and provides the basis for continuing growth in businesses.
AutoZone and FedEx: A Quick Comparison
When I was looking at financial and other information about AutoZone and FedEx, I wondered about the relative ages of their respective management teams and directorates. Information is readily available through Google Finance from Reuters. I looked up information for both FedEx and AutoZone.
Basic information identifies what I’ll call “named executives,” which are the member of management who are named on the list, and directors. For Autozone, there are eleven named officers and eleven directors (with one overlap in William Rhodes, who is Chairman of the Board, President and CEO). For Autozone, there are eight named officers and twelve directors (with one overlap in Fred Smith).
The following tables summarize information about the two companies:
Clearly, the management team at AutoZone, with an average age of 51 years, is younger than the named management at FedEx, which has an average age of 61 years. The age spread of the named managers at AutoZone is from 38 years to 60 years of age. The age spread for the named managers at FedEx is from 45 years to 72 years.
This is a one-dimensional analysis and I don’t plan to push it too far. For example, if three additional managers at FedEx were named, bring the total to eleven like AutoZone, it is unknown whether that would increase or decrease the average age of the group there.
The average age of directors at both companies is about the same, at 58-59 years. The oldest director at AutoZone is Pitt Hyde (71). He stepped down as chairman in 1997, shortly after he was diagnosed with and treated, successfully, for prostrate cancer. AutoZone has had a non-founder at its helm since then.
The oldest directors at FedEx are Fred Smith (70) and James Barksdale (72) who has a long history with FedEx. The youngest directors at AutoZone and FedEx are 49 years and 45 years, respectively. These are just facts.
The Question
The question is: Does having a younger, perhaps more energetic management team provide better results over time? I looked at the relative stock performance of AutoZone and FedEx over the last five, ten and more years. The ten year chart is interesting:
Since the time of the Great Recession, AutoZone’s stock has performed sharply better than that of FedEx. Is it because of younger management at AutoZone? Is it because of relentless pursuit of a stock repurchase program that has helped fuel growth in earnings per share? Has the auto self-help parts business been a better place to be over the last decade?
I don’t know for sure. The difference in stock performance between the two companies is likely the result of a lot of factors. But there it is.
How Long to be CEO?
AutoZone and FedEx have clearly followed different strategies and have different histories of evolving managements. Management transitioned years ago away from Mr. Hyde at AutoZone. Health issues may have forced the change, or created the desire on his part to change, but the change occurred.
Mr. Smith has been chairman/CEO for about 44 years. He is likened to a “monarch” CEO in a recent Fortune article. Jeffrey Sonnenfeld writes about monarchs:
They are often brilliant visionaries who believe that they are the one person on earth who is truly indispensable to their companies. William Black ran the Chock full o’Nuts café chain for 60 years, with his last two from his hospital bed at age 83. Monarch CEOs are driven by an elusive quest for an immortal, lasting legacy, as well as for the heroic stature that comes with the position. They want the world to be different because they lived, but they can be blinded by their visions.
Threatening successors are often eliminated before the board realizes what happened, increasing the board’s dependence upon such monarch CEOs; that was the case with Richard Fuld at Lehman Brothers. They often suffer a stormy, feet-first exit—either dying in office or as the victim of a palace revolt…
Obviously, I’m not the first person to notice Mr. Smith’s long tenure as CEO of FedEx. Any way you cut it, FedEx has been an enormously successful company under his direction. I guess that’s not the issue. At some point, we need to ask ourselves as managers this question: how long is long enough?
Private Company Experiences
A Bad Situation
Long tenures as CEO are not uncommon in the world of private companies. Mileage may vary.
I recall one company many years ago that we valued for, I believe, some form of gifting. The purpose is not important. The facts were something like the following:
- Company had been operating in its manufacturing niche successfully for many years, although profitability and margins had been trending down. Dad was in his mid-80s, and was driven to the office for a few hours each day, rolling his oxygen tank along with him. Maybe both the company and Dad were running out of gas at the same time.
- Dad was involved with or made every significant decision for the business. His son was about 65 at this time and was the nominal president. His frustration with the situation was apparent during my interviews.
- We provided the necessary valuation, and I stayed in touch with the son at the company. His frustration continued to grow. After a couple of years, the son died unexpectedly.
- Dad was unable to handle this well, and his interest wained in the company. Unfortunately, there was no one who was in a position to lead. Within a couple more years, this once fine company was in bankruptcy.
That situation was tragic, and it was clearly exacerbated by the fact that Dad could not or would not let go of the management strings.
A Much Better Situation
This second company was in the auto parts manufacturing business. It was founded by another Dad, who had three sons, all of whom worked in the business. Dad’s goal with the company was to groom one or more of his sons to run the business and, perhaps, to sell to a strategic buyer after another few years of growth.
One of the sons rose to the top and was made CEO. Dad did remain as chairman, but he stepped away from management. In fact, he moved to another state. The other sons also worked in the business, but Dad clearly passed the CEO mantle to one son. There were no inter-family rivalries over this.
The company in fact more than doubled in size during the son’s tenure as CEO. A strategic buyer did come along, and a substantial amount of liquid wealth was created for the family.
My Own Situation
I recognized during my fifties that I did not want to wait on management and ownership transition for Mercer Capital until I was in my 60s or 70s (should I be so lucky!). We began planning for management transition in the early 2000s. Our former president was on a path to retire, and I had no desire to step into that role.
Matt Crow was named president of Mercer Capital in 2009, when he was 40 years of age. He and his team have been running the company ever since. I’m grateful we made the decision to transition management when we did and that we executed on that plan. We are a better company as a result.
Conclusion
If you are a baby boomer and are still running your company, maybe it is time to start thinking seriously about transitioning management. We’ll talk about ownership in other posts. Managers who hang on beyond their “appropriate” tenure will inevitably run off potential successors who are capable. Every company needs a new breath of energy every some number of years.
If you would like to talk about issues related to management transitions at your company, or about any valuation-related matter, please do call (901-685-2120) or email me (mercerc@mercercapital.com) in confidence.
Until next time,
Chris
Please note: I reserve the right to delete comments that are offensive or off-topic.