Corporate Heroes: Extraordinary Execution

The stock market slump -- between March 2000 and early February 2003, the value of publicly traded stocks has declined by $7 trillion -- hasn't shown signs of improving in the short term. But it has exposed deep conflicts of interest, resulting in an erosion of the trust in the U.S. equity-driven form of capitalism.

Widely viewed as an era of "anti-corporate anger," this malaise can also be explained as a normal cycle of capitalism. Periods of great economic expansion produce excesses that can trigger recession -- during which the expansions' most prominent business leaders become the downturns' villains. A clean-up period follows, forming a base for the next economic expansion to build upon.

While the present reality portends a dismal view, there is more to the story. It's clear that the primary solution to the economic challenges will not come from outside reformers or regulators, but rather from those within corporate America itself, and will be led by corporate heroes.

Corporate heroes are those companies and individuals who are overcoming obstacles to execute extraordinarily -- in industries and markets where peers are failing. It is already happening. In fact, for many, it's never stopped -- it's what they do, consistently and vigorously.

An oft-ignored business principle is that profits flow from happy customers who are acquired and retained by happy employees who work at value-driven companies. Value-driven companies operate according to a fundamental belief that to succeed over the long term, they must foster relationships with various constituencies: employees, customers and various communities (shareholders, vendors, neighborhoods, the media, competitors and more).

This emphasis on long-term relationships -- as opposed to the transactional approach typified by an Enron Corp. or WorldCom Inc. -- is key to restoring the lost trust between managers and investors, between managers and employees, and more. It is also key to what sustains those companies who are profiting even in the current environment: those referred to here as "corporate heroes."

The four companies profiled are role models of those who excel in five key areas, outlined in the box below (Qualities of Corporate Heroes). Each is demonstrating extraordinary execution of its core business during a period of declining or flat business performance among its peers.

Edward Jones' pursuit of long-term relationships helped it top Fortune's annual "100 Best Companies to Work For" lists in 2002 and 2003. During a dismal 2002 for the industry, it maintained full employment of its 25,278 employees.

Winning in a tough industry. Since Managing Partner John Bachmann took over in 1980, the firm has expanded from 309 to 8,705 offices in the U.S., Canada and the United Kingdom, making it the seventh-largest U.S.-based brokerage. It has been adding offices and revenues at 16.5 percent and 21 percent annual rates, respectively. In 2002, it performed far better than its peers, increasing revenues 5 percent to $2.2 billion and earning $142 million in net income. The Securities Industry Association (SIA) projects that its member firms would collectively see a 38.1 percent decline in revenue in 2002, to $151.8 billion, from $245.2 billion in 2001.

Treating employees well. Ninety-seven percent of its employees surveyed for the Fortune article gave it high ratings for managerial honesty, benefits, small offices and no layoffs, despite tough times. It spends 3 percent of payroll on training, providing an average of 149 hours per employee per year, and spending, on average, $75,000 to $100,000 on each new investment representative, including internal mentors to help trainees pass the Series 7 exam (required for selling securities). It offers profit sharing and employee ownership; about 6,300 employees are limited partners and receive a percentage of its annual profits, which have grown 23 percent a year since 1980.

The firm hires 4 percent of 100,000 applicants each year, only 20 percent of whom have prior securities experience; most are former teachers, accountants, attorneys, fast-food managers and salespeople. "We look for high achievers with a sense of purpose," says Bachmann.

Building long-term customer relationships. Over a century old, Edward Jones' policies -- scorning frequent trading, avoiding penny stocks, options or commodities and declining to provide online trading -- are intended to reinforce long-term broker/customer relationships.

The company's development explains the roots of its beliefs. In the 1970s, Ted Jones, the son of Edward D. Jones Sr., positioned the firm as "just plain folks bringing Wall Street to Main Street." He went knocking on doors on country roads in rural Missouri and Illinois and discovered underserved investors -- retirees and small-business owners with at least $10,000 to invest -- on whose trust the firms' success still depends.

The early '70s also represented a pivotal point in the firm's development. It almost collapsed, says Bachmann. "The Dow was down 50 percent, and we had only $1 million in capital left. Since we couldn't afford to serve institutions, we decided to focus all our attention on individual long-term investors."

Scarce capital in the '70s forced the company to make strategic decisions. It took the best advice of management gurus Peter Drucker ("the purpose of a business is to get and keep a customer") and Michael Porter ("strategy is about making tradeoffs") to create a company that employees want to work for.

Bachmann says, "Our employees love working here because of the alignment between our activities and the needs of our customers. A big part of this alignment was deciding to get out of activities, like commodities trading, which were of no value to individual long-term investors. We measure profitability by office, and we have made choices -- from our telecommunications network to account statements -- that support the needs of these customers."

Colgate-Palmolive Co.'s success is based on its enthusiasm for perfecting details. Founded in 1806, $9.3 billion (2002 sales) Colgate-Palmolive (Colgate) is the most profitable company in one of the most profitable industries. Famous for its toothpaste and other household products, between 1997 and 2002 Colgate generated a five-year return on common equity (ROE) of 71.9 percent, compared with the personal products industry average of 46.5 percent and the S&P 500 average of 12.2 percent. During the same period, its sales grew at a mere one percent annual rate, yet profits surged almost 14 percent annually, and its net profit margin averaged 11.4 percent, significantly higher than the 7 percent of its peers. It operates in 218 countries, with 75 percent of its sales coming from outside the U.S.

Performance, not ego. Key to Colgate's superior results is CEO Reuben Mark, who puts corporate performance above personal glorification. He's shunned Wall Street's urge for what he calls a "needle-moving event," and instead of making big acquisitions or divestitures, has consistently met or beaten quarterly earnings estimates. Colgate's stock has responded: $10,000 invested in Colgate at the beginning of 1984, Mark's first year as CEO, would have grown by September 2002 to $335,000 -- $85,000 more than if it had been invested in GE.

Strategic focus and cost-cutting. In the 19 years since Mark took over, Colgate has made only two large acquisitions and divested businesses where it was not a leader. Focused in four core areas -- oral care, personal care, household cleaners and pet food -- this focus paid off in 1998, when Colgate toothpaste surpassed Procter & Gamble Co.'s Crest as the best-selling toothpaste in the U.S.

Consistent with his focus on execution, Mark has improved performance with an obsessive concentration on profitability, setting long-term goals for profit margins and using the goals to achieve tight control over costs. Between 1995 and 2002, Colgate's gross profit margin climbed from 47.9 percent to 57.3 percent. His goal is to reach 60 percent by 2008.

Mark has raised margins by consolidating manufacturing and distribution and automating outmoded plants. He's sold unrelated businesses and reduced staff by over 50 percent, from a peak of over 80,000 in 1984 to the current 38,500. Colgate's tight cost controls enabled it to record higher profits without increasing the price of a tube of toothpaste in the U.S. between 1991 and 2001.

Effective and efficient marketing. Cost savings and improved advertising effectiveness were also achieved through a 1996 consolidation of Colgate's advertising firm, Young & Rubicam Inc. Since then, it's cut by 25 percent the number of commercials shot and reduced the number of offices creating ads from 100 to under 12, while, at the same time, maintaining a tight concentration on marketing. Twice yearly, Y&R executives spend two days at Colgate headquarters reviewing ads with Mark and other executives -- a practice that Y&R's chief marketing officer, Craig Middleton, opines is an unprecedented level of involvement for a CEO of a $9 billion company.

Techtronic Industries Co. Ltd. (TTI), a publicly traded distributor of power tools and floor care appliances, has outperformed its peers in revenue and profit growth -- as well as return on equity -- over the last five years.

Founded in 1985 as Marco Polo Industries Co., a small trading company for mainly hardware and household appliances, it evolved into TTI when management found it could not deliver the value its customers wanted. "We found that being a trading company, it is difficult to control our product quality, and that we cannot give exclusivity of the design and product to our customers," says Chairman and CEO Horst Pudwill.

In 1985, he and his partner, Roy Chung, set up their first production facility in Hong Kong, and went public in 1990. From a modest beginning, the two have transformed TTI into a global power tool powerhouse that generated $1.25 billion in 2002 sales, of which over $1 billion comes from power tool products. Moreover, it expects growth of 20 to 30 percent in 2003, making TTI the second largest North American supplier of power tools by sales volume and value.

Winning over the consumer. TTI exploits technology trends to meet its customers' needs. "Our products are good value for the money," says Pudwell. "While never the cheapest, when customers take into account their quality, features, innovations and price, we offer the best choice. This requires market sense, product knowledge, quality control, good customer services (equal to talents) and a good cost-base production facility, plus a strong distribution network to move products in volume."

This philosophy became the basis of TTI's growth. With the 1980s advancement of battery technology, the convenience of cordless electrical products became popular. Spotting this as an emerging trend, Pudwill says, "We shifted our focus on producing and developing cordless tools and battery packs. We made our first three cordless products for Sears in 1986. By 1988, we expanded our product range and exceeded a volume of over one million pieces in sales."

TTI has also expanded through judicious acquisitions that have enabled it to control its own destiny. Its 2000 acquisition of the Ryobi brand is viewed by Pudwill in terms of melding the strengths of East and West. "We take the innovations and market feedbacks from the West and manufacture our products in the low-cost region, Dongguan, China, where we moved production in 1988.

"Also, since we have the fully integrated supply chain -- from design, engineering, production to marketing and distribution -- we have shortened a lot of our development time, and the response time to the market is much faster," he adds. Ryobi's market share in North America has tripled in the nearly three years since TTI acquired it.

The Container Store, a privately held 28-store retailer of home organizer products, demonstrates how focusing internally can promote external growth. Generating $239 million in 2001 revenues, the firm has landed the second spot on Fortune's list, both in 2002 and 2003, by offering a slew of employee benefits, such as one of the highest pay scales in the retail field.

Solving customer problems culture. The Container Store sets growth targets with culture and people in mind. Co-founder and CEO Kip Tindell believes that 20 percent to 22 percent annual sales growth is necessary to maintain the firm's culture and develop its people. That culture is built around helping solve customer problems by investing in sales associates' skills and product knowledge to demonstrate merchandise and suggest solutions. "We want to evoke an emotional response in a customer," says Tindell. "After customers install a closet organizer, we want them to do a little dance the first few mornings. Then we want them to tell their neighbors and their sisters-in-law."

Hiring the best. To sustain a high level of enthusiasm, The Container Store hires the "best" employees -- defined by Tindell as those who use creativity, enthusiasm and intuition to devote themselves to customer service. One fundamental principle is that one great person out-produces three good ones. As a result, he says, "It makes sense to have the courage to hold out longer to find that great person."

To keep those people, it pays 50 to 100 percent more than the industry average, spending 10 percent of its sales on payroll, compared to the industry average of 3 to 4 percent. Thus, the average salesperson earns $36,256, and all its employees get 100 percent match for their 401(k) plan, up to 4 percent of pay. A practical benefit of higher pay is an 8 percent annual turnover rate -- far lower than the retail industry average of 120 percent.

Employees at The Container Store help recruiting by inviting friends, relatives and even store customers to job interviews. Once hired, employees must participate in 235 hours of product training in their first year and 162 hours each year thereafter -- far more than the retail industry average of 7 hours a year.

The Container Store keeps employees engaged by letting them know how the business is doing in a variety of ways. Huddles -- required meetings of sales associates held twice daily -- tell them what's selling, what's not and how to improve results. Huddles also include product ideas, daily sales objectives and morale-boosting exercises. The company distributes corporate sales results daily, and consistently reiterates the firm's focus and direction with employees at all levels. The result of this engagement: 94 percent of employees feel they make a difference.

Reinventing the business. Tindell and his co-founders have maintained their entrepreneurial spirit for 25 years. The management team constantly tries to reinvent the business, and Tindell says it's never been tempted to go public, believing that private ownership has contributed to sustaining their enthusiasm. His executive team sets goals, such as "creating the perfect store." This goal drives them to tirelessly look for ways to improve.

During the 18-year bull market that began in 1982, the pursuit of ever-higher stock prices dominated the corporate world. This quest encouraged a short-term orientation that led some executives to do anything -- stuff distribution channels, cut staff and even cook their books -- to meet quarterly earnings targets. Three years of bad economic and corporate news have exposed the fundamental hollowness of an unstinting focus on shareholder value.

The companies profiled here exemplify a different corporate purpose -- the pursuit of value in its many forms. These corporate heroes overcome challenges through an obsessive focus on building long-term relationships with employees, customers and their many communities. These companies focus on sustaining value-driven enterprises. Indeed, value-driven enterprises -- not regulatory reform -- may prove to be the last best hope for the long term for restoring the lost trust on which our system of equity capitalism so heavily depends.

Qualities of Corporate Heroes

People. They create opportunities for personal growth, teamwork and human relationships, and they avoid layoffs.
Financial. They consistently imbue with integrity their financial reporting, boards of directors, executive compensation and audit committees -- and did so prior to the recently enacted regulations.
Shareholder Returns. They achieve exceptional shareholder returns in industries where their peers have experienced losses.
Community. They encourage and actively participate in support through a variety of means, such as the arts, schools and/or charities -- and at a variety of levels: local, national and international.
Business of the Business. They reinvigorate themselves, grow despite taking big risks, find new markets, turnaround difficult business situations and compete vigorously but fairly.

PETER S. COHAN is president of Peter S. Cohan & Associates (www.petercohan.com), a management consulting and venture capital firm. He's the author of seven books, including the forthcoming Value Leadership: The 7 Principles That Drive Corporate Value in Any Economy (Jossey-Bass, A Wiley Imprint, 2003).

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