Good Governance as an Investment Strategy

Apple is the most valuable company in the world today. Had you invested $10,000 dollars in Apple’s stock when Forrest Gump was released on September 23 1994, you would be sitting on a cool $6.7MM. Had you waited to invest for the release of the IPhone on January 9 2007, you would still have $661k in your account. The same $10,000 investment made when Tim Cook was appointed interim CEO in January 2011 would be worth today $189k.

Apple’s board of directors has eight other members, all of whom are independent. Dr Art Levinson is the current Chairman. He is also the CEO of Calico, an Alphabet Inc. venture and is the former CEO of Genentech. Al Gore, the former US Senator and Vice President, is the longest serving board member with an 18-year tenure. Conversely, Monica Lozano, the CEO of College Futures, and Alex Gorsky, the Chairman of Johnson & Johnson, are very recent additions. The role of the board is clearly defined.

“Apple’s Board of Directors oversees the Chief Executive Officer and other senior management in the competent and ethical operation of Apple on a day-to-day basis and assures that the long-term interests of shareholders are being served. To satisfy the Board’s duties, directors are expected to take a proactive, focused approach to their positions, and set standards to ensure that Apple is committed to business success through the maintenance of high standards of responsibility and ethics.”

The board meets “only” four times a year, yet not all members are able to attend all meetings. The eight non-executive members serve on one or more of three committees: Audit, Compensation, and Nominating and Corporate Governance. Non-executive directors hold executive sessions without the presence of management, including the CEO, at least four times a year typically following regularly scheduled board meetings. Board members also regularly meet Apple Inc.’s stakeholders including employees. “Candidates are selected for their independence, character, demonstrated leadership, and relevant skills and experience, including financial literacy.” Although Apple’s board seeks diversity currently, only three members are female.

Apple’s board does not play a role in setting the company’s strategy or running the business. Those functions, as is usually the case with US corporations, are the purview of the company’s executives. The investor relations website displays prominently the top eighteen executives (five of whom are female). There are division heads such as World Wide Marketing, but also a Director of Greater China, and heads of corporate function such as general Counsel or Communications.

You would think that many companies, especially the perennial under-performers so abundant in the periphery of the EU and Emerging Markets, would study and implement such a successful governance model; you would be wrong. For many years now, friends have reprimanded us often for being too negative on these companies and their leaders.

While this is possibly the case, stock market performance is clearly not supportive of many strategies. ENEL, a utility, is Italy’s largest company by equity market value today. It was not public in 1994, but had you invested €10,000 at its IPO in September 1999, you would be sitting on €33,252. You would have made more money from a constant maturity fund invested in 10 year Italian Government Bonds.

Inditex is the parent company of Zara and Spain’s most valuable company. €10,000 invested at its IPO in 2001, would be worth today €144,138. Yet, while this 13.8% CAGR is a very decent long-term return, the stock has treaded water for the past five years.

Petrobras is the largest company in Brazil. $10,000 invested in 1994 are worth $53,480 today. Had you invested instead in Chevron, you would have $161,789, which is three times as much money, even though Chevron has “only” compounded at 10.7% in that period.

Samsung Electronics is the most valuable company in South Korea, and perhaps the closest comparable to Apple. This company has been tremendously successful in becoming one of the largest semiconductor manufacturers and in giving Apple a run for its money in the smart phone market, yet $10,000 invested in its stock in 1994 is worth just $504,974 today, which is 92%, less than an equal investment in Apple in that period.

Governance is a very important contributor to shareholder returns for better or for worse. Ferrari is the second most valuable company in Italy today. It was spun-off from FCA in 2016. This was one of many such distributions to first Fiat and subsequently FCA shareholders executed by Sergio Marchionne and supported by Fiat’s controlling shareholders.

The total value creation that ensued is complicated to calculate precisely but suffice to say that Fiat’s equity market value in September 1994 was €7,345MM. Since then shareholders have received 50% of Stellantis in a merger with Peugeot worth €28.2bn today, as well as a €5.5bn dividend prior to the completion of the merger in 2020. In 2016, FCA shareholders received 80% of Ferrari worth €37.9bn today. Over the years, they also received Fiat Industrial in a 2010 spin off, as well as stakes in Faurecia, Il Corriero de la Sera (a newspaper publisher), and Editoriale (a publishing house).

In 2004, Mr Marchionne accepted the CEO position in an asset rich and cash flow poor industrial conglomerate. With a deft hand for simplifying an unwieldy industrial conglomerate, assisted by the luck that often accompanies the bold in the case of the Chrysler merger, lots of Hutzpah, and the support of the board, he returned the Agnelli family to the ranks of the seriously wealthy. Their 52% stake in Exor N.V., a listed Dutch holding company through which they own their stakes in Stellantis, Ferrari, Partner Re, CNH Industrial, Juventus FC, the Economist, and Grupo Editoriale is worth nearly €10bn today. Quite a few companies would benefit from such vision from its controlling shareholders.

Just as was the case in January 2021, there is a very big rotation underway from the Growth to the Value factors. Perhaps some underperforming management teams and the boards that oversee their function will get a respite as a result. Nevertheless, we are of the opinion that many of these companies’ shareholders will benefit from changes in strategy and in some cases in management. There is a very large opportunity to redress the wrongs of three decades of poor decision-making and underperformance, but there needs to be a catalyst to get the ball rolling. We would like to help set that process in motion by opening up a constructive dialogue with management and independent board members. We have such a strategy in place in one of our investment vehicles.

It is not always fun nor comfortable to rattle the cage. Indeed, it may call for some changes in our personal lifestyle, as perhaps it will become uncomfortable for all involved to be sitting next to the targets of one of our campaigns at the golf club’s spike bar. We are fully cognisant that most of our efforts may be ignored, but we also believe that some people eventually do the right thing when it is shown to be in their best self-interest as well. In any case, we cannot hide our excitement and enthusiasm for this new venture. We are also grateful to the person who suggested we should make this strategy our focus.

This entry was posted in Reports from the Field. Bookmark the permalink.

Leave a Reply