Here’s an important article from my former colleague Jeff Sonnenfeld, who demonstrates that returns from activist funds are less than 50% of the S&P 500, and result in dismantling some formerly great companies. DuPont, in particular, does not deserve the kind of activist proxy attack Nelson Peltz is waging. It is a great company that is well run by CEO Ellen Kullman.
For all the talk about activist shareholders—usually large hedge funds—getting seats on company boards and pushing to make strategic, value-enhancing changes, these activists haven’t fared especially well. Investing in index funds would have yielded better returns over the past few years than most activist funds.
How much better? In 2013 the HFR Activist index posted a total return of 16%, less than half the S&P 500 Index’s total return of 32.4%. In 2014 the HFR Activist Index saw returns of 4.8%, far below the S&P 500’s 13.7%.
Contrary to their rhetoric, many activist investors lack the Midas touch. Their recent returns may exceed the performance of other hedge funds, but they still lag behind the broader market. Ironically, the major companies targeted today, including Apple, PepsiCo, Dell, Dow and DuPont, generally deliver returns that soar above that of activist funds.
Some funds, such as Third Point, Relational Investors, Starboard Value and TPG-Axon Capital, have driven constructive outcomes at Yahoo, Office Depot, Hewlett-Packard, Home Depot and SandRidge Energy. Yet too often activists pressure companies to cut costs, add debt, sell divisions and increase share repurchases, rather than invest in jobs, R&D and growth.
They do all this in the name of creating shareholder value. But that value is often short-lived and sometimes comes at the expense of long-term success, if not survival. Despite Carl Icahn’s successes—such as Chesapeake Energy (Netflix and Apple were great investments but they resisted his advice)—his overlooked failures include TWA, WCI Communities, Blockbuster and Dynegy, all of which are either out of business or have filed for bankruptcy.
Nelson Peltz’s Trian Fund Management and its activist assaults on the Bank of New York, PepsiCo and DuPont are an interesting case in point. Trian delivered only an 8.8% return in 2014, nearly five percentage points below the S&P 500. In 2012 Trian was up a scant 0.9% while the S&P 500 was up 15.9%. Clearly, this undermines Mr. Peltz’s argument that DuPont’s board needs Trian and Mr. Peltz to drive better returns.
Five of the 11 companies where Trian has a seat on the board underperformed the S&P 500 between the time Trian got its seat and the end of last year—Wendy’s, Legg Mason, Mondelez International, Family Dollar and Chemtura, which went bankrupt in 2009 after two years of Trian board involvement. Contrast these companies with State Street, which rejected Trian’s breakup and board-seat demands and has handsomely outperformed the S&P 500 (129.5% to 80.5%) over the past four years—without Trian’s help.
Even better returns were available to those who invested in companies that activists sought to topple. Suppose on Jan. 1, 2010, you put $100 each in DuPont, an S&P 500 mutual fund and Trian. Your investment in DuPont would be worth roughly $240 today. Your S&P 500 fund would be worth roughly $200. And your investment in Trian would we worth roughly $190. DuPont’s returns handily beat those of Trian in 2010, 2012 and 2014.
Mr. Peltz now is waging a costly, distracting proxy battle to break up DuPont to deliver short-term gains while demanding he personally have a seat on the company’s board. This despite Trian’s poor showing versus DuPont and the latter’s recent hiring of two new directors, Edward Breen and James Gallogly, two former CEOs and tough industrialists whom Mr. Peltz unsuccessfully solicited in 2014 to serve on Trian’s board of directors.
Given DuPont CEO Ellen Kullman’s success since taking the reins in 2009, it’s not surprising that Trian’s assault has been thwarted. Nevertheless, DuPont has offered to accept a current Trian board nominee—other than Mr. Peltz—out of respect for Trian’s 3% stake.
As Securities and Exchange Commission Chairman Mary Jo White said in a March 19 speech at Tulane University’s Corporate Law Institute: “Reflexively painting all activism negatively is... using too broad a brush and indeed is counterproductive.” Activists and their target companies, she said, should “step away from gamesmanship and inflammatory rhetoric that can harm companies and shareholders alike.”
But with activist funds now boasting $120 billion under management—up 30% in the past year—there is no harm in asking what their own investors are getting back. The most aggressive activists court governance advocates and state pension funds with costly media campaigns against target companies that, paradoxically, outperform them. Perhaps they should be more active in raising their own shareholder value.
Mr. Sonnenfeldis a professor of management and senior associate dean of leadership studies at the Yale School of Management.
The willingness to admit your weaknesses and your vulnerabilities is actually very powerful. You can gain strength by admitting your faults to yourself and your peers. When you admit it, you make it a part of what we share as information about ourselves. It makes it okay for me to bring it up, which is crucial for working through conflict. You can even joke about it to ease tension. “You’re doing that thing again.”
But if you keep it to yourself or worse, are unaware of your own faults, then people don’t know what to do. You become the elephant in the room.
“I lead small group discussions with my students at Harvard. Everyone tells their life story. They share the good, the bad and the ugly. We also talk about how they “lost their way.” It’s liberating for everyone. It’s a relief to hear someone admit they’re not perfect. It allows me to share a similar experience, and how I bounced back.
I remember when I started playing the corporate CEO game. I thought I was on track. I thought I was a valued leader. But early on, it was hard for me to admit that I was losing the race. I had to come to my senses and get real about what was working and what wasn’t.
My greatest crucibles are now part of my story. I noticed that in telling my story, warts and all, people not only know who I am, but they don’t “reject me” when I tell them a less than flattering aspect about myself. People understand because chances are they’re been to some difficult places, too.
You can’t be comfortable in your skin until you know who you are, and you’re willing to open up and admit who you are. I’ve never met anyone who didn’t have weaknesses. But I’ve met a lot of people who have blind spots. They won’t acknowledge or admit where they fall short.
Here are ways to help you become more comfortable with telling your whole story.
Read Bill George’s book, True North, which debunks the myth of the superhero top executive. Over 100 executives talk about their failures and personal tragedies, and how these setbacks shaped them as leaders.
Keep a journal. Not ready to go public with your faults and failures? Write them out first. According to Teresa Amabile, work diaries offer people a new perspective on themselves as professionals and what they needed to improve.
Find a mentor. We’ve all hit roadblocks in our career. It helps to talk with someone who has “been there” to guide you over the hurdles.
This article is published in collaboration withLinkedIn. Publication does not imply endorsement of views by the World Economic Forum.
Author: Daniel Goleman is the author of The Triple Focus: A New Approach to Education
Posted Feb 19, 2015 by Bill George |
| Filed in: Leadership
ABC News (NEW YORK) -- Basketball legend Michael Jordan’s weapon of choice early in his career was his slam dunk, but he also had a secret weapon in his arsenal: meditation.
George Mumford was Jordan’s meditation coach, and he said practicing mindfulness helped Jordan and his other clients -- including Los Angeles Laker Kobe Bryant -- get in the zone.
"If you really look at the elite athletes, you will find they have this ability to be in a moment and actually slow things down," Mumford told ABC News. "Mindful meditation helps them do that."
Meditation is a practice that’s more than 1,000 years old and involves pausing to focus on breathing and relaxation.
Off the basketball court, experts say meditation is becoming more common in the corporate board room as well.
Bill George, former CEO of medical device company Medtronic, said he used to meditate in secret behind a closed office door. Now a fellow at Harvard Business School, he meditates 20 minutes, twice a day with the door wide open.
Meditation "was the best thing that ever happened to me, in terms of staying grounded," he told ABC News. "It has helped me become a much better leader."
Leading companies such as Google, Aetna and General Mills have meditation programs for their employees. George teaches a Harvard course on leadership and requires students to do a reflective practice, in which they quiet down and either meditate or answer introspective questions in a journal.
“To be a successful leader you need to be authentic, grounded, and you need to be mindful," George said.
Meditation helps in the business world by helping people “get out of [their] own way," said Dr. Judson Brewer, a professor of medicine and psychiatry at the University of Massachusetts Medical School.
"Suddenly, you are in the zone," he said.
When a basketball player is caught thinking about the shot they just missed, they are more likely to miss the shot in the next moment, Brewer said. Meditation techniques help people train their minds to stay in the present without getting caught up thinking about other stressors.
"Don't believe me, just try it a little bit and see if it is actually helpful for you," Brewer said.
I am honored to receive a Lifetime Achievement Award from Trust Across America. Authenticity and trust go hand in hand. My full article on Trust as the Essence of Leadership can be viewed here and full text below.
Trust is the essence of leadership – the coin of the realm. Unless people build trust with their colleagues, they cannot gain legitimacy to lead, nor can they empower others.
Recent studies have shown that only half of Americans trust their leaders. Since the 2008-09 global financial crisis, many Americans have lost trust in their leaders and the institutions they lead.
Gaining the trust of people is essential for every leader. Leaders cannot be effective without full confidence of the constituencies that grant their institution its legitimacy, nor can capitalism function without trust.
No matter how effective your strategy, your vision, or your communication, you will fail to achieve the desired results for your organization if you cannot inspire trust as a leader. Lack of trust in your leadership will cause your team to fear failure, resulting in less risk-taking, and therefore, less innovation. Building a culture of trust starts with you. You must quell fears of organizational power by exhibiting authentic behavior that inspires trust and fosters an open, safe environment.
To be worthy of trust, leaders must have a clear sense of their True North – the purpose of their leadership and the essence of their beliefs, their values and the principles by which they lead. If they stay on course of their True North and do not deviate under pressure, then they can build trust among colleagues and legitimacy among all their constituencies.
What’s required are new leaders who are grounded in authenticity, relationships, and emotional intelligence. To gain trust, they must be genuine, sincere, transparent, and true to their word. People sense who is authentic and who is not. Only when they are authentic will people grant them the support they need to lead organizations.
To strengthen the trust and confidence in America’s leaders, we need a new leadership mindset and a new breed of leaders, with five characteristics in common:
They should be authentic leaders, focused on serving their clients and all the institution’s constituents, rather than charismatic leaders seeking money, fame, and power for themselves.
They should place the interests of their institutions and society as a whole above their own interests.
They should have the integrity to tell the whole truth, admit their mistakes, and acknowledge their shortcomings. Authentic leadership is not about being perfect. It is having the courage to admit when you’re wrong and to get on with solving problems, rather than covering them up.
They need to adapt quickly to new realities, changing themselves as well as their institutions, rather than going into denial when things don’t go as intended.
They need the resilience to bounce back after devastating losses. Resilience enables leaders to restore trust by empowering people to create new solutions that build great institutions for the future.
Earning trust requires significant time and effort, and must come from a place of authenticity. Trust cannot be faked. You cannot become a trusted leader by trying to imitate someone else. You can learn from others’ experiences, but there is no way you can be successful when you are trying to be like them. People trust you when you are genuine and authentic, not a replica of someone else.
Don’t be afraid to show your vulnerability. Be transparent with your team, even when the truth may be unpopular or inconvenient. Don’t punish those who bring you bad news. Encourage risk-taking and celebrate “good failures” as opportunities to learn and move forward.
Remember: trust starts with you but it is a win-win for everyone.
DAVOS, Switzerland – For 10 minutes at the World Economic Forum here on Wednesday afternoon, a conference room jammed with more than 100 high-powered delegates was entirely silent.
The rare interlude of equanimity came during a panel called Leading Mindfully, a discussion of how meditation was impacting the workplace.
And with a mix of breathing instructions, management theory and personal reflection, the session provided a stark counterpoint to the frenzied discussions about geopolitical instability, currency fluctuations and climate change in nearby rooms.
“This is a very unusual event at the World Economic Forum, and it’s diagnostic of something much larger that is happening,” said Jon Kabat-Zinn, a molecular biologist who helped popularize mindfulness meditation in recent decades. “What was once considered a radical, lunatic, fringe thing has been incorporated into medicine, science, academics and more.”
In recent years, meditation has grown more prominent in the business world. Companies including General Mills, Aetna and BlackRock are teaching meditation to their employees, and students at Harvard Business School can take classes on mindful leadership.
“Even Goldman Sachs is doing it,” said William George, a member of the Goldman Sachs board who was on the panel and says hundreds of the investment banks employees regularly meditate.
At the same time, hospitals, schools, sports teams and the military are promoting incorporating mindfulness in to their training.
“Teachers are desperate to teach kids how to pay attention, rather than screaming at them,” said Mr. Kabat-Zinn.
In Davos, meditation has been on the agenda for each of the last few years. But this year, there was more interest than ever, according to Mr. Kabat-Zinn. An upcoming panel at the event will explore how meditation changes the brain, and this year, Mr. Kabat-Zinn is leading popular meditation sessions each day at 8 a.m.
“A few years ago no one showed up,” he said.
The panelists, who also included Arianna Huffington, spent time discussing how meditation can benefit workers, but the highlight of the event was the meditation session.
Led by Mr. Kabat-Zinn, the stretch of silence was intended to get delegates out of their heads, and instead notice what was happening around them.
“The first thing we notice when we practice mindfulness is how mindless we are,” said Mr. Kabat-Zinn, defining mindfulness as “paying attention, in the present moment, and non-judgmentally.”
The serenity was occasionally broken by the voices of other delegates in the halls, buzzing about contemporaneous panels including “The Geo-Economics of Energy” or “China’s Impact as a Global Investor.”
And the silence was too awkward for restless participants. Several people left during the meditation session, while others checked their phones.
When it was finished, Mr. Kabat-Zinn asked participants to raise their hand if their minds had wandered. Everyone in the audience raised their hands, including Matthieu Ricard, a Frenchman who has ordained as a Tibetan monk and been called “the happiest man in the world.”
Much of the discussion centered on how meditation might help executives perform better. “The main business case for mindfulness is that if you’re more focused on the job, you’ll become a better leader,” Mr. George said.
Mr. George said that Wall Street firms, in particular, could benefit from the virtues of meditation.
“It causes us to behave less aggressively,” he said. “Certainly, the financial community could use some of that.”
Meditation, the panelists said, also can reduce stress, improve well-being and promote calmness, clarity and creativity.
The room, with views of the Alps, was packed to capacity, with many attendees sitting on the floor. At two whiteboards around the room, artists drew interpretive illustrations of the themes being discussed.
“Here we are in this beautiful country, and has anyone bothered to look up at the mountains?” Mr. George asked. “Or are we just looking around for the next person to meet?”
It was perhaps an unusual theme for the power brokers at the event. But many on the panel and in the audience professed that meditation gave them a competitive advantage. And the burgeoning interest in meditation at the event mirrors a broader societal shift, in which yoga, mindfulness and meditation are becoming part of the mainstream.
“Modern science is validating ancient wisdom,” Ms. Huffington said. “We are living through a major tipping point.”
Attendees in the audience chimed in with their own stories. A professor from India described bringing meditation to her university with good results. An executive from an American company said mindfulness had improved relations in the C-Suite.
Another theme espoused by the panelists was the virtues of putting down smartphones and getting away from computer screens. Mr. Kabat-Zinn opened the session with a request for attendees to put away their devices and focus on being present for the duration of the unusually long, two-hour session. Not everyone complied.
“The truth is, we show much more compassion to our smartphones than ourselves,” Ms. Huffington said. “If we treated each other as kindly as we treated our smartphones, it would be a major revolution.”
Attendees at the session included executives, academics and politicians from around the globe.
“There is a hunger for this type of approach, especially at the World Economic Forum,” said Dean Ornish, a clinical professor of medicine at the University of California, San Francisco. “We focus so much on success and power, but people are beginning to realize that the more at peace we are, the more we can spread peace in the world.”
And at least one financier was taking the message to heart. Paul Meehan, who manages Europe, the Middle East and Africa for Bain & Company, the management consulting firm, has been practicing yoga for five years and attended the session.
“This is one of the most impactful sessions I’ve been to,” he said.
Twitter CEO Dick Costolo for long has been questioned over his leadership abilities by many of the critics, and the latest to join the list is Bill George, a professor at Harvard Business School. They all are of the opinion that Costolo should resign from the position of CEO, and make space for someone worthy.
Twitter needs a new team
On Friday, George said on CNBC that the company needs a new team at the top and therefore Costolo should resign. George made Costolo’s comparison with the other biggies like Mark Zuckerberg, the CEO of social networking giant Facebook Inc (NASDAQ:FB) and with Larry Page CEO of Google Inc (NASDAQ:GOOG). Harvard professor said that Costolo is not at par with these names, and hence should step down allowing a better person to acquire the position. However, he did expressed his liking for the micro-blogging site, and said that he visits the site five times a day on a regular basis.
In an interview that lasted for few minutes, eight distinct complaints were put forward by the former CEO of Medtronic, George. The CEO of the medical device technology company said that with the losses that the company is making, it was not possible for the Street to stay with them for long. After the statement, he tweeted, “Time for new leadership @twitter; otherwise TWTR loses out to Facebook and Google.”
Time running for Costolo
Besides George, there are few others as well, who feel the need for Costolo to exit. Last week, Robert Peck, an analyst at SunTrust predicted that Costolo would exit the company in less than a year’s time. The news spread like fire, and the impact was clearly visible on the stock price, which was on the decline since the start of the year. This year the stock had registered a decline of 41%, but the news sent it up by 3.6%.
For the third-quarter, Twitter posted a revenue of $361 million up 114% on YoY basis. The same growth could not be seen in the number of active users while rival Instagram is stealing all the limelight. Facebook has more than 1.35 billion monthly active users while Twitter has no more than 284 million.
Twitter will report its next quarterly results on Feb. 5, and if the company fails again to meet the subscriber growth estimates, then the voices calling for the exit of Costolo will only get louder.
There seems to be no end to calls for resign of Twitter Inc CEO Dick Costolo. Investors, experts and shareholders are demanding Costolo to resign as he was unable to run the company successfully. In a recent development, Bill George, a senior Harvard Professor has said that Twitter Inc’s CEO could not run the company in the right way. He thinks that the Costolo has not the right repo, PR and fame like a CEO should have, CNBC reported.
George thinks that Dick Costolo does not maintain the right skills that are needed in a CEO of a big tech company. He gave the example of Larry Page and Mark Zuckerberg and said that these people have a grip and innovative approach towards the product curve whereas Twitter Inc’s CEO does not understand the product dynamics. George also thinks that Twitter Inc CEO has an ‘inflexible approach’ that is a major hurdle in the way of product innovation and growth.
George said that there must be a change in the upper management of Twitter Inc. The management has been getting rid of the excellent product development team and hiring the new guys which haven’t proven themselves.
The professor thinks that Twitter Inc is almost against advertising, which is a key revenue stream in the modern tech business. Twitter Inc faced a tough year 2014. Many developers and executives left the company. There were many embarrassing slippages, lack of innovation and monotonous interface updates, which have forced the investors and users to ask Twitter Inc’s current CEO to resign.
Activist investors have the “hot hand” these days. Their calls to break up companies have attracted growing attention, and their hedge funds continue to add new capital. Bill Ackman, for example, netted more than $2 billion on his investment in Allergan. He pressured its board to sell to Valeant, but profited even though the company was ultimately sold to Actavis. Carl Icahn challenged Apple’s cash hoard, while Mr. Ackman dislodged Robert McDonald as chief executive of Procter & Gamble. Chief executives are concerned that their company may be next.
Fueled by growing funds under management and emboldened by media coverage, the activists have recently shifted their focus to targeting America’s best companies. Why are activists pursuing those companies instead of moribund companies on the wrong track? The lofty strategic rhetoric of the investors notwithstanding, they are looking for quick gains. This may net handsome profits in the short-term, but it places the competitiveness of America’s great global companies at risk.
Let’s examine four situations among some of America’s best companies — Amgen, PepsiCo, DuPont, and Allergan — to see where activists have it wrong.
Amgen Under the leadership of Kevin Sharer and Bob Bradway, Amgen has been a stellar performer. In the past five years, its stock has increased 185 percent. Apparently dissatisfied with this performance, Mr. Loeb wants to break up the company. Break it up? It’s all one business. Centralized research and development fuels innovation that results in a steady array of breakthrough drugs. Amgen has exceptionally high net income margins of 27 percent and generates $6 billion a year in free cash flow, even after investing 22 percent of its revenues in research. Mr. Loeb’s idea of splitting older drugs from newer drugs would destroy one of America’s most productive innovators by taking away the cash it needs to develop new drugs, meet patient needs and fuel the company’s growth.
PepsiCo When she became chief executive in 2006, Indra Nooyi foresaw the need for healthy foods and beverages — trends currently sweeping the globe — and devised a long-term strategy to broaden PepsiCo’s portfolio. Pepsi’s performance the past three years has been exceptional. Its 52 percent stock price increase is double that of its archrival, Coca-Cola, which is trapped in a single-minded strategy focused on carbonated soft drinks and bottled water. Nevertheless, the activist investor Nelson Peltz is agitating to split PepsiCo in two, just as he did with Kraft. But both Kraft and its spin-out, Mondelez, are struggling.
DuPont Perhaps stung by his inability to influence PepsiCo, now Mr. Peltz is trying to break DuPont into three pieces. Has he not studied what the chief executive, Ellen Kullman, has been doing the past five years? When she took over in 2009, 200-year-old DuPont was a disjointed conglomerate without a clear strategy. Its stock had declined 62 percent since 2000. Ms. Kullman immediately went to work to reshape DuPont’s portfolio for the future, spinning off slow growth, low-margin businesses like performance chemicals and coatings. Now, DuPont is focused on three high-growth, high-margin businesses: agriculture and nutrition, biotechnology and advanced materials. Ms. Kullman is using DuPont’s vaunted central research labs to drive innovation in all three sectors. Her strategy is working. The company’s stock has increased 250 percent since she took the reins.
Allergan Bill Ackman successfully partnered with Valeant’s chief executive, Mike Pearson, to put Allergan in play and ultimately force its sale to Actavis, but why was that warranted in the first place? Since David Pyott joined Allergan in 1998 as chief executive, he created a more than 2,400 percent increase in Allergan’s stock. Allergan spends 17 percent of its revenues on research and development. These smart research investments have sustained the company’s high growth rate. Valeant’s strategy was to cut Allergan’s research spending to 3 percent of revenues, lower its taxes from 34 percent to 3 percent, and eliminate its executive team — which would ultimately make the company noncompetitive. For what purpose?
In contrast, an outside perspective can be a powerful catalyst for improvement at performing companies that are not performing well. Ralph Whitworth of Relational Investors helped save Home Depot by unseating its chief executive, Bob Nardelli, in favor of Frank Blake, leading to a decade of strong performance. Mr. Whitforth also turned around a dysfunctional board at Hewlett Packard, one that had previously fired three successive chief executives. Likewise, Jeff Ubben of the hedge fund Value Act Capital Management pressured the Microsoft board for change after 14 years of marginal leadership by Steve Ballmer. Since Satya Nadella took over last February, the tech giant’s stock has jumped 75 percent.
But in the case of strong companies with effective managements, activist attacks are enormously distracting. Executives focus on saving their companies and short-term financial moves, instead of winning global competitive battles, creating great products and building new businesses.
Trying to break up great companies only weakens one of America’s greatest competitive advantages: the leadership, strength, and adaptability of its global companies. The activists should keep their focus on the underperformers, and work to build the next set of great companies like Amgen, PepsiCo, DuPont and Allergan.