The qualities and characteristics of successful business leaders
• There are exceptional managers in SA who have created enormous value for shareholders
Quality businesses possess certain attributes that make them longterm winners: enduring competitive advantages (such as the franchise value of brands or a store footprint that is hard to replicate), robust and adaptable business models, good cash flows and excellent returns.
These characteristics often result in such businesses compounding revenue and earnings at a higher rate than expected and the market rewarding this superior growth with a premium rating when compared with the average company.
However, one attribute that is often overlooked when assessing a business’s track record is the role played by management. While most companies are heavily subject to the macroeconomic conditions of the day, good managers make things happen and get on with the job of driving shareholder value.
We are fortunate to have many examples of truly exceptional businesspeople in SA, who have created enormous value for shareholders over time. What is it that makes the managers in question so special? Consider the following two case studies:
Stephen Saad, Aspen Pharmacare Holdings.
One of SA’s great entrepreneurs, a few things about Saad stand out throughout Aspen’s successful history. He has had a passion for the business and an unwavering ambition to globalise and there has been conviction in his strategy. He has bet big, even in the face of market scepticism.
While investors are typically wary of acquisitive growth and tend to find more comfort in lower-risk, organic growth strategies, Saad has delivered on all the firm’s transactions. Aspen’s acquired businesses are highly cash-generative and the group has simplified the manufacturing
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process of acquired product portfolios, delivering — and in most cases exceeding — promised synergies.
Saad owns 12% of Aspen and has never sold a share.
Despite the magnitude of recent transactions, equity has been issued on only two occasions (in 1999 and 2008-09).
As an owner, he understands that equity is precious and an expensive source of funding — if you believe your business is undervalued — as any issued shares need to be serviced, via dividends, in perpetuity.
Saad has ensured that each major geographic hub is run by a capable management team.
He also has a strong deputy in Gus Attridge — himself a significant owner — who deserves credit for the financial structuring and integration of these various acquisitions. Simon Crutchley, AVI. Crutchley’s standout strengths as CEO include his extremely disciplined approach to capital allocation — underperforming assets that could not be fixed were disposed of (Alpesca, Denny and Sir Juice).
He has walked away from numerous potential acquisitions for which vendors had unrealistic price expectations and invested heavily in existing product categories for which he believed returns could be enhanced. The result was an increase in return on equity from 13% to 27% from 2005-16.
Crutchley ensured that AVI returned excess cash to shareholders by consistently increasing the ordinary dividend payout, share buy-backs and special dividends. He exercises
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tight cost control, although this is coupled with a willingness to invest in brands and product categories to enhance returns.
Judicious price management ensures that value market share is protected and maximised and talent management is rigorous.
Between management changes, Crutchley has often stepped in to run and fix underperforming divisions.
Saad and Crutchley are by no means the only examples of exceptional business leaders in SA. Several others readily spring to mind, including Koos Bekker (former CEO of Naspers), Pat Goldrick (former CEO of Cashbuild), Adrian Gore (CEO of Discovery Holdings) and Kevin Hedderwick (former CEO of Famous Brands).
While these individuals are by no means homogenous — some are born entrepreneurs, while others are highly skilful managers — they have certain common qualities. They have enormous shareholder focus. More often than not, they are significant owners of the businesses they run and guard the value of that equity jealously.
They are prepared to think big, act big and follow through on their convictions if they believe these to be correct. They do so even when it may be unpopular with the broader investment community.
They are focused. While their control is often centralised, they have an intimate knowledge of all underlying operations. They are highly strategic. But they are also prepared to roll up their sleeves and get stuck in to fix and turn around underperforming operations.
They are good allocators of capital and will invest if it enhances shareholder returns, but will otherwise return excess cash to shareholders.
Warren Buffett is famous for saying he prefers to buy businesses that are so wonderful that an idiot can run them, because sooner or later one will. There is some truth to this statement — after all, a business with good fundamentals and average management is preferred over a business with average fundamentals run by good management.
However, there are several examples in our market that prove that exceptional people have generated outsized returns for shareholders in both good and average businesses. Once you identify these special people, back them and you will be rewarded handsomely.
THEY ARE PREPARED TO ROLL UP THEIR SLEEVES AND TURN AROUND UNDERPERFORMING OPERATIONS