Refusing to play by the rules enabled this CEO and his company to achieve corporate success. Here's how!
Every Wednesday, I talk about various tips and topics about investing. My hope is to help you boost your investment portfolio and achieve financial stability in the long run. Ready to learn about today’s topic? Continue reading to know this company’s unconventional approach in letting people know what it’s up to during earnings calls.
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Refusing to play by the rules enabled this CEO and his company to achieve corporate success. Here's how! Paul Henry O’Neill was an American businessman and government official who served as the 72nd U.S. Secretary of the Treasury for part of former President George W. Bush’s first term. Prior to his term as secretary, O’Neill was Chairman and CEO of industrial giant Alcoa and chairman of the non-profit global policy think tank RAND Corporation.
O’Neill’s Unconventional Strategy of “Annoying” Wall Street Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, says back in his consulting days in the 1990s, one of his biggest corporate clients was Alcoa. The aluminum producer was one of his favorite clients. He still remembers when a Wall Street executive told him Alcoa's CEO (O’Neill) annoyed investment analysts. Why was that so? Imagine strolling the halls of a Wall Street research firm during earnings season. Most likely, everyone would be getting ready to tune into a management call about a company’s quarterly or annual performance, with many young analysts’ fingertips ready above their keyboards, waiting to plug management’s numbers into their financial models. You might have heard about recent short films being shot on the iPhone 14 Pro. The smartphone is great for everyone—from photography enthusiasts to industry professionals. Professor Litman says most management teams wouldn’t dream of deviating from this path. They’re trained to give analysts tidy numbers for their tidy reports. … BUT NOT O’Neill. He refused to play by the rules. Instead of opening with earnings guidance, margin percentages, or capital expenditures, his focus always started with SAFETY. Unable to type “safety measures” into their thousand-row spreadsheets, sell-side equity analysts would steer the ship back on course. They’d ask questions that fit their way of looking at companies and profits. Here’s the thing: Had these analysts been more open-minded, they would’ve seen what O’Neill was doing. They would’ve told their investors to buy every share of Alcoa they could. Let’s dive deeper into this corporate success story… O’Neill was adamant that employee safety and shareholder returns aren’t mutually exclusive. In his very first meeting with investment analysts, he touted his unconventional approach to performance in front of a Wall Street crowd. O’Neill insisted: “I’m not certain you heard me. If you want to understand how Alcoa is doing, you need to look at our workplace safety figures. If we bring our injury rates down, it won’t be because of cheerleading or the nonsense you sometimes hear from other CEOs.” In Alcoa’s case, aluminum production can be dangerous. O’Neill knew that lots of employees got injured every year in the industry. So, it was not only humanitarian to focus on workplace safety, but also reflected the business’s foundation of efficiency. According to O’Neill, high injuries meant “we’re not doing a good job, not just for the lives and health of our people, but also for our investors and shareholders.” … and that’s why he emphasized safety before discussing revenue, income, or anything else. Such an emphasis helped add USD 24.53 billion in market value during O’Neill’s tenure as Alcoa’s CEO and led to a roughly 10-fold return for shareholders. Today, Alcoa still has a reputation as one of the safest aluminum companies. How to Know Where a Company is Headed If you want to know what a company is going to do in the future, what keeps management up at night, and what drives the team’s motivation, you shouldn’t just look at the company’s annual 10-K report. Why? According to Professor Litman, the BIG issue with the 10-K is that it’s backward-looking. Other than some relatively small sections about risks or analysis, the overwhelming majority of data is historical. A better document to look at is the DEF 14A. Here, the company is required to disclose who’s on the board and management team—how much they’re paid and how they’re paid. Take note: Compensation is CRUCIAL to forecasting performance and estimating valuation. If you want to understand management’s strategy and ensure the board is putting its money where its mouth is, look at compensation metrics. The reason for this is that incentives dictate behavior. Management will do what it’s paid to do. Period. Oh, and another thing: The DEF 14A is public information. Anyone can and should access it. Look through the compensation plan before investing in any company. This will help you make sure management is doing the RIGHT things for its business and shareholders. Besides, who knows? By doing this, you might even find the next Alcoa, while Wall Street analysts are burying their heads in their spreadsheets. Hope you’ve found this week’s insights interesting and helpful. Apple stood as one of the best places to work for in the mid-2000s because it was run by some of the most legendary names in the tech world. Learn more about this tech giant’s “brain drain” in next week’s article! |
