by Bob Andelman

When it comes to lessons on bad management, college professors will use dot-com company case studies as illustrations for the foreseeable future. A nascent industry was brought to its knees by the combination of color-blind entrepreneurs and managers ("Is red ink the good kind? Or is it black? Do we need bona fide profits to support our projections or can we just snow the suckers again with more zeroes?"), short-sighted venture capitalists ("If we throw enough money at these kids, something is bound to stick. And if it doesn't, we'll cut their legs off in six months."), greedy day-traders ("CompanyGreenhouse.com rose 275 percent yesterday! Hold! Hold! Oops.") and young, untested analysts ("Black Friday? Was that a New Wave band in the 1980s?").

There was a massive underestimation of the competitive pressures operating in the dot-com market. Almost every reasonable application of the Internet, whether it was travel services or business to business exchanges, had perhaps seven times as many companies competing for share as that market could absorb. The barriers to entry were low, and each one thought it would change the world. Few did.

The second problem was that they couldn't convert the tremendous customer value into economic value for themselves. Customers captured most of the value that was created, so none of the companies presented good profit prospects. Once the Internet industry consolidates and the shake-up is finished, the survivors will look a lot better.

A third factor in the Internet mess once known as the New Economy ­ and now as the Interim Economy ­ was the belief that the incumbents didn't have a chance. Well, the incumbents showed that they still bring plenty to the mix, if you think of the Internet as by and large just another sales channel, which, in reality, is most of the time.

Many of the best-known Internet companies were nothing more than a Web page and fancy code. What did them in was that they lacked the essential fulfillment and service capabilities. Customers still want their orders filled, they want their e-mail inquiries answered, and they want someone to confront when things get screwed up, as they do in any business. The upstarts couldn't handle that, but the incumbents ­ perhaps less fleet of foot ­ could.

Real estate is about location, location, location. Finding great growth companies is about management, management, management.

It could be a great business, but if it lacks good management, sooner or later it will screw up.

What It Takes

A profitable company needs a number of quality ingredients. A strong, experienced management team with a history in the business is the best place to start. It should be a team approach, not one led by a single leader, because a group of five or six people who know how each other thinks can make good things happen when they all push in the same direction.

Sustainable management ­ its pedigree, the applicability of the managers' backgrounds to the business, its stature in the industry, its track record of accomplishing stated goals, its ability to backtrack when it thinks something has changed and business is not going the way it wants, as well as its experience and wisdom ­ is always an issue. This is motherhood and apple pie in Profits 101.

Within every industry, there are always some companies that do better and some that do worse. What separates good management from bad, the wheat from the chaff? Management's choices of markets and how the company is positioned make a big difference. Management makes a big difference in terms of setting up the direction and getting everyone on board and moving consistently and aggressively in that direction.

Management is a primary driver in profitable companies because, theoretically, management is given capital by the investor, and management is supposed to take the capital and create additional shareholder value. Some management teams can do that, and some can't.

In today's world, a profitable company also needs a top financial person. The financial people are getting more and more important; the dot-coms didn't spend their money well. Unfamiliar with standard practices ­ and the reasons they exist ­ they were suddenly shocked that they were out of money. "Now what do we do?"

If the business manufactures a product, it needs a manufacturing manager who knows what he or she is doing.

If it is an engineering company, it needs an R & D manager with a solid reputation in the industry, so that his counterparts know how good he is. Marketing is tougher, because those managers tend to be great speakers and great presenters. Every marketing manager says, "Next year is going to be great." That is not always true.

What we also know about great teams is that they figure things out when business goes wrong.

A great team can't save a fundamentally bad business. It just doesn't happen. But by the same token, great teams have put some marginal businesses back on their feet, and there have been some stunning turn-arounds when good management teams got ahold of faltering businesses.

The Intel management team endures times when it is challenged by the marketplace. It is clear that there will always be cyclical slowdowns in the demand for processors. And the world doesn't need the next Pentium to run the Web. So the Intel team has an enormous challenge before it. But people still bet on Intel; why wouldn't they? You wouldn't want to bet against that team. You wouldn't want to bet against Microsoft. You wouldn't want to bet against Cisco. Their valuations have been cut down ­ welcome back to Earth, fellas ­ but Cisco still trades at 40 times earnings because of its growth rate and because the world just believes that the Cisco management team will continue to position its company near the top of the game.

Built From the Top

One of the curious things that happens in extremely profitable entrepreneurial companies is that often the founders can only carry the operation so far. Vision, drive, charisma and street smarts are one thing, but when a four-store, $10 million local chain grows into a 1,000-store, $40 billion international behemoth, even the most successful business leaders look for more seasoned help.

All along its astounding growth path, The Home Depot prided itself on promoting from within. But there came a point in the mid-1990s that the company's financial and logistical expansion was so rampant that co-founders Bernie Marcus and Arthur Blank started looking for outside people with experience doing business at the cash and inventory levels they were approaching.

The ultimate symbol of this was the hiring in 2000 of the former number two executive at General Electric, Robert L. Nardelli, as the new president and chief executive officer and a member of the company's board of directors. Nardelli spent nearly 30 years at GE, the last five as president and chief executive officer of GE Power Systems.

"Bringing in somebody that high up from the outside essentially sent a signal to the corporation that 'just because we are the greatest, it is not business as usual,'" says Gary Balter, a retail analyst and managing director at Credit Suisse First Boston in New York City.

Wal-Mart did the same in 1995. It brought in John Menzer, former president of Ben Franklin Retail Stores Inc., to be CFO. It hasn't gone to an outsider at that level on the operating side yet, but it did on the financial side. Menzer made a huge difference to that company, focusing it on return on investment.

Even if management acknowledges that it lacks the expertise in-house to do certain things, hiring that talent from outside is unnerving because it means bringing people in who don't know them or the way they do business. In other words, culture shock is in store for the insiders and the outsiders.

Nardelli is a good example. He brings with him some credentials and expertise that Depot needs. Yet you may wonder whether the GE magic will work at Home Depot, which is an entrepreneurial-driven, roll-with-the-tides company, as opposed to GE, which is rigid and structured in everything it does. Can Nardelli blend or bring something new to the table?

"The answer is absolutely yes," says Wayne Hood, a retail analyst and managing director at Prudential Securities in Atlanta. "I believe that it would have hurt Home Depot more by not bringing on someone like Nardelli. It is always hard to embrace it, but if you can, you get a competitive advantage and survive."

Can fellow GE alumni W. James McNerney Jr., now chairman of the board and CEO of 3M, and Nardelli transform their new companies into the next GE using Six Sigma techniques and all the other tools they were trained with? The market felt that way with both stocks, responding positively to the hiring of each man. The market felt that Home Depot and 3M were getting sound, savvy managers who would shake them up. Those men are expected to know the fundamentals, and they understand shareholder value because GE accomplished that.

"I would rather have a known as opposed to an unknown," says Bill Fries, a portfolio manager and managing director of Thornburg Investment Management in Santa Fe, N.M.

The real question is, what management process is best for Home Depot, and what is best for 3M? They are probably different. But the alternative would be hiring someone for Depot who is familiar with the hardware retail sector, and he may not have the other expertise that enriches GE alumni. Depot is damned if it does, damned if it doesn't. But if it needs a good manager, it probably wants to take the one who has as many skills in the skill set that the job requires.

However, people who were successful at GE often struggle when they go elsewhere. That's because at GE, they were used to an environment where people think like they do. When GE people are given a plan or a budget, they are expected to meet it, and they do. Then they go to other companies, and if they don't make budget, co-workers say, "So what?" They quickly get frustrated.

Nardelli was second to Jack Welch, but that doesn't mean he was Jack Welch. Still, assuming he will succeed is a logical step because of where he was trained, what he saw and what he knows. He is also from a generation of performers and doers. Procter & Gamble veterans get similar credit for their past association.

Make no doubt about it, Depot co-founders Bernie Marcus and Arthur Blank were very, very involved in what went on in that company, particularly over the first year as Nardelli learned what it was all about.

Mr. Inside, Mr. Outside

Clearly, it's important for investors to know whether present management came up from within the company or was hired from outside.

For example, at Philip Morris, promoting management from inside the company is probably better. Growing up on the tobacco side or the food side of Philip Morris and being promoted to higher positions such as executive vice president or president or CEO has a more positive impact on most analysts and the markets. In tobacco, it is important for executives to understand that business ­ political, cultural and all the other brick-packed baggage. Pulling in someone from Exxon to Philip Morris might be tough. It would be hard to bring in someone from the outside to fill a top spot unless he was from within the industry.

If it is a company that is struggling, one that has been stuck in its ways, is not aggressive in new product introductions, or is losing market share, then new management from outside the company, with new ideas or good industry experience, might be a plus. It depends on the situation.

McCormick & Co. Inc., best known for its line of spices, traditionally hired from within, and within the McCormick family at that. That left the company stuck in its ways and slow to adopt new ideas. Recently, the family brought in an experienced new management team from within the industry. It is bringing in younger managers with lots of energy who are open to new ideas and new ways to market, breathing new life into a 112-year-old company.

At Adobe over the last couple of years, a change of management personnel and management approach has had an effect on the company's results. Some individuals changed, and that had an impact. And then there was an explicit decision from the very top of the company to simply change the methods and infrastructure it used to run the company on a more consistently executed model. That was a fundamental transformation from what had gone on before.

If many managers are brought in from the outside, that could also signal some degree of internal trouble. If the board had confidence in its management team and its ability to rejuvenate leadership within the organization, it wouldn't need outsiders.

There is a difference between a well-established company and a start-up that reaches a point where founding management says, "This is beyond our comprehension." The same is true if two major corporations merge and the combined entity is fundamentally different from either of the originals.

But when a traditional, established company, operating on a day-to-day business, brings in somebody from the outside, it signals that there are problems that require someone with a different skill set to solve. Or it indicates the company's ambition to reach a new plateau. Either situation implies concern about the consistency of earnings.

On the other hand ­ that's three hands, for those keeping track ­ if a company hires an outside zealot, someone with a track record for driving successful change through organizations, that could be a very positive signal to the shareholders.

Carly Fiorina at Hewlett Packard is an example of such a zealot, as is Steve Jobs returning to Apple Computer. Sometimes they don't work out, like George Fisher being brought into Kodak from Motorola. That just never worked. Was he really a zealot, or was he successful because of the managerial environment at Motorola? It is difficult to capture and duplicate that in a short period of time in another company ­ even one whose whole business is capturing and duplicating.

What does it mean when a company hires a number of executives from the outside? It's an indication that it wants to change. It is not happy with its performance and it is looking to do something different.

Plugging In to GE

Some leaders are great in only one cycle; there are the builders, there are the motivators, and there are the changers. Depending upon where a business is in a cycle, sometimes the person at the helm is good in one of those three disciplines but falls down on one of the other characteristics and needs a refresher course. It is hard for a leader to expand his characteristics and keep the corporation fresh through all those cycles of demand.

"I was with GE when it had its first $5 billion of sales a year," says Don Burnett, a retired partner from PricewaterhouseCoopers in New York City. "I think Jack Welch has done a great job. Maybe it is because of his training courses that everybody goes through. Maybe it is because of the way GE picks people coming in there. And maybe it is the way that it gives responsibility. Whatever it is, the culture at GE works ­ until you get out of GE. That is why I worry about what is going to happen at Home Depot and at 3M (where Nardelli and W. James McNerney Jr. went, respectively), because they are used to good staffs, lots of research, people telling them what to do, and they were surrounded by great worker bees. Not necessarily the most brilliant in the world, but the guys who work their tails off and get you anything you want. I would never put a GE guy into a small company, because he will die."

And not every GE project works out, either.

How many people knew that GE owned Montgomery Ward before it went belly up in early 2001? GE Capital Services purchased 127-year-old Montgomery Ward and brought it out of bankruptcy in 1999. Whoever ran Montgomery Ward for Jack Welch either did a rotten job or inherited a thankless task.

"The thing I really liked about GE in terms of its hiring, because it fit me to a 'T,' is it hires BAs out of school," Burnett says. "It wants a person who went to Indiana, Purdue or Michigan, not an Ivy League school. It wants someone who came from a relatively poor family, who wants to work their ass off and get somewhere, someone who played some team sport in high school and was a leader in certain organizations in high school. That is how GE hires. That was me. What we hired at Coopers, and what Booz-Allen hires, are the MBA guys that came out of Ivy League schools. (Consulting firms) think they walk on water. I don't like that, and none of the guys on my team came out of Ivy League schools. They all came out of good Midwestern schools, and they wanted to work their tails off to be better than their dads were. So I like GE. That is still how they hire, by the way."

The idea is finding young people who are teachable and don't yet think they know it all. Companies like GE will then inculcate these men and women in the ways of their culture.

A Cultured Pearl

Profitability starts with the senior management team having a view of the world that is a correct one for its industry and the times. This is the most important thing, that it can articulate that vision all the way down to point of sale, getting people to buy into it and creating a culture around that vision that allows for its execution. Because if you start at the top and people don't buy it below or you just don't have the culture, then the company will run into problems.

At Wal-Mart, Sam Walton had a vision about how to serve consumers. He believed in simultaneously offering them great value and driving down costs through technology, then passing more savings on to them. The supermarket business was already about those things, so the people Walton hired early on from the food industry recognized his hybrid of high-volume, low-margin selling for what it was. They applied the food model to the discount store industry and used technology to speed it along. So Walton had this vision and surrounded himself with people who understood and could execute it.

With his vision firmly inculcated, Walton let people make mistakes and move along, and they changed when they needed to change.

"When Bill Fields was running the company," Wayne Hood recalls somewhat ruefully, "Wal-Mart lowered prices just to lower prices. It wasn't tactical about it; it would just cut prices across the board. Now what Wal-Mart is more concentrated on is, 'How do we tactically manage a category? Maybe we take prices down here but up in another area.' It became much more sophisticated in its pricing scheme. This is a good example of evolving strategies over time and sustaining growth."

Walton's good idea for a company was made better by virtue of him being one of the greatest people persons ever seen in retail. He convinced his people what it meant to lower prices and pass that value on to the consumer, as well as what customer service meant and what it meant to be friendly.

"Whatever you were investing in with Sam Walton," says Gary Balter, "you were investing in Kmart with a better operator."

One of the things that helped Wal-Mart is that, even as critical as people are about Arkansas, being headquartered there actually helped that company. Its rural roots really helped keep it grounded.

Wal-Mart's unlikely location in Bentonville also sent another message that the old real estate emphasis on "location, location, location" is not a one-size-fits-all commandment.

You can build real teamwork in that environment. It is hard to recruit people to go to work in Bentonville. But once Wal-Mart gets them there, there is something else that is driving them and keeping them there. It is that sense of loyalty, perhaps family, that is hard to find in other companies.

What Wal-Mart did over time was to prevent silo creation, where it is me versus you, and it developed more of a team effort there than you might see in other companies.

Take a Giant Leap

In almost any analyst's report, the author will write about "quality of management."

It is such an overused term. Unfortunately, if you look at most of the people making those evaluations, we have a disproportionate number of people in the market today who have seen only the bull market. So their ability to craft perceptions on quality of management is limited.

A true test of quality of management is that there will be winning times, but there will also be times when you are losing market share and you have to make tough decisions. And the true character of a strong business leader is not how he performs in the good times but how he directs his company during the tough times.

Investors should track the prevailing winds but also look for the next steps out. A strong leader leads by example. And a strong leader has a passion for the business.

Look at Wal-Mart. What was Sam Walton? Well, he led by example. He had a passion ­ like Bernie Marcus at Home Depot ­ for the business, in that he went out to the stores and in his managers meetings discussed what he learned during his recent visit to the stores. It might be that some low-level employee had a merchandising idea and was willing to share it with Sam. If it got implemented, management recognized and rewarded the employee no matter what level of employment the idea came from.

Walton kept a listening ear, so his employees felt they had access when Sam came to the store. If they had an idea, they knew that if it was implemented, they had made some contribution. And they felt good about their job. They felt good about their employer.

Another factor: Is the company so flush with success that it is trying to do too much? In a retail environment, for example, does management put too much pressure on its stores in terms of new growth initiatives? If it is growing at a rapid rate, does management run the risk of promoting people too fast? In other words, a retailer needs a talent pool to advance, open new stores and pursue its initiatives. These moves can stretch a seemingly healthy organization beyond its immediate capacity to cope. Having the cash flow to grow is one thing; possessing the manpower and experience to grow profitably is another.

Pedal to the Bare Metal

AutoZone Inc. went to school at Wal-Mart.

J. R. "Pitt" Hyde III, who founded Auto Shack in 1979 (it became AutoZone in 1987), was on the board of Wal-Mart for seven years and put in place Wal-Mart-style quarterly visits by top management. Visiting executives wore company uniforms and name tags, helped customers by finding products on the shelves and even ran cash registers, much as Home Depot execs are pressed into duty when they don orange aprons on store visits. (All Home Depot managers and senior executives, including corporate lawyers, are required to work in the stores before taking their official positions.)

AutoZone had everything right ­ for a time.

"If you were the AutoZone business executive who just put in a new POS (point-of-sales) system, you might have thought you had made a great financial decision," says Craig Weichmann, a corporate finance consultant in Memphis, Tenn. "But a month later, when you were actually in an AutoZone store, and the cash register can't ring up a simple sale, you quickly learned whether or not you made a great decision."

That was the kind of real exchange between the field troops and AutoZone execs that sharpened everyone's focus. Out of nowhere, AutoZone quickly rose under Hyde to be the untouched leader in that sector.

Hyde operated the way Sam Walton did, which meant he was constantly a presence in AutoZone stores. He was known for spending at least 25 percent of his time in the stores. And he rewarded the people in the stores. At annual meetings, instead of recognizing sales growth, he gave superlative awards. One employee, for example, drove two miles out of his way because a customer's car broke down. He picked up the customer in his own car, brought him back to the store, then called a tow truck. Hyde gave him an "Extra Miler Award."

What was management communicating to employees at such meetings? That AutoZone rewarded the people who took care of its customers. "Our business is customer service." But that approach needs a strong personality to continuously propel it at the top, a Sam Walton (Wal-Mart), Bernie Marcus (Home Depot) or Richard Branson (Virgin). And when Hyde retired as chairman of the board in March 1997 (he remains a director with substantial holdings), some of that spark went with him.

Overhead; Underfoot

Let's reduce business to the simplest of concepts.

You make money in a company where the products are. You make no money at corporate headquarters. The only money that is made in corporate headquarters is a treasury function in terms of its investing and handling the money, so the fewer people there are at corporate, the better off the company is. The more people it has, the more hand-offs it has. Every time it has a hand-off, there is a potential error, meaning Sally will check Joe's numbers before doing whatever she plans to do with them. Once she is satisfied, Sally will hand it over to somebody who will check her numbers.

Before Philip Morris Cos. Inc. acquired General Foods, management built "a monumental thing" in Port Chester, Conn., says retired PricewaterhouseCoopers partner C. Don Burnett. It's a beautiful building, but a white elephant that Philip Morris immediately closed and put up for sale. "Those are costs it can't get back," Burnett says. "It is not going to make the product any better. I don't mind spending lots of good money on mechanizing the plants like the automobile industry did; that is money well spent. But for office people? For HR people and people like me, you don't need to spend money on that."

Make sure that the management of a company in which you are interested knows who its customer is.

When Burnett went in to assess his corporate clients, his goal was to reduce their corporate headquarters staff as much as possible. In human resources, he says, most companies don't need 101 people at headquarters. They need policies and procedures, and much of the HR function can be more effectively outsourced.

When two Western mining companies merged recently, many observers were astounded at how backward each operated in certain respects. One was fairly current on technology. The other didn't spend any money on computers. It still relied on 30-year-old systems requiring manual entries and manual changing. The company had 40 people on staff that its new partner didn't need because it was still doing things the old way.

One of the mining companies had a large in-house legal group, but it still farmed out work to outside lawyers, which in many cases duplicated work.

These are examples that sound like they couldn't possibly exist in the 21st century, but they do.

Where is the company's money spent? If management spends it on people and plant and products, great. If it spent money on headquarters and airplanes and buildings, that just shows that it is not really focusing on what the company is. There are hundreds of examples of companies building monumental headquarters and then going out of business.

Does the company own a country club, as Lucent Technologies did? Those things are wonderful if it is an established business but not for a start-up company. And even Lucent was forced to unload the Hamilton Farm Golf Club, its $40 million development in the town of Peapack-Gladstone, N.J. "The complex," wrote Simon Romera of the New York Times, "includes a helicopter-landing pad, a guest home of 20,000 square feet with 10 suites, a wine cellar and tasting room and a full-time concierge." Not exactly the breed of bleeding edge R & D that investors expected.

And corporate ownership of airplanes is almost never justified.

If it is a mining company, it is probably justified, because mines tend to be located away from major population areas and airports. It certainly is not justified if management lives in New York, Chicago, Dallas, or Boston. If management lives and does business in a major metropolitan place, it doesn't need its own plane. And if it does have a plane, it shouldn't buy one; it can lease hours. It is a wonderful perk. Anyone who has tried it loves flying in corporate planes, but few companies can justify it on the basis of cost.

Outsource the Force

One thing many of the dot-coms did get right: Outsourcing corporate functions pays off. And there is no law that says a company doing business nationally or even regionally must have everybody under the same roof.

A business may want its top manufacturing person down the hall from the CEO just to make him feel confident about what is happening in the field, but the rest of the team would probably do better reporting in from the field. And the IT department (information technologies) can be anywhere.

A corporate headquarters with no more than 50 to 100 people is a good sign. The "plants" for insurance and finance companies are at headquarters, so their needs are different.

Secretary of Straight Talk

Paul O'Neill, who ran Alcoa as chairman and CEO from 1987-2000 before being appointed Treasury secretary by President George W. Bush in 2001, is a pragmatic corporate leader.

He let his people do what they wanted, but he could be tough at monthly meetings. He had a tiny office, just a cubicle. He had a small headquarters. And he liked to do things at the wrong time.

For example, when he was doing really, really well, he brought in consultants to help his people reduce costs worldwide. Then, when the business cycle went down ­ and aluminum is a cyclical business ­ Alcoa would be in fine shape. He was a no B.S. guy. He was not a marketing man. Many investors want a leader like O'Neill who makes them feel that he is a solid guy and not a marketing guru. When O'Neill spoke, people understood exactly what he would do. His focus was on profitability ­ growing the aluminum business and nothing else.

If a leader's reputation is good, it will have a substantial effect on his ability to bring in or create a good team. O'Neill ­ who was president of International Paper Co. before joining Alcoa ­ felt corporate management was about doing four things right:

1. Solid Team.

He selected a top management team to implement Alcoa's strategies.

2. Consistency.

He asked himself and his people the same questions over and over: Are we in the right business? Are we handling it well? Are we picking up the right companies?

3. Safety.

He talked safety all the time. That is why employees have few days off because of injuries at Alcoa. Every speech he gave, you knew what he would say. He would talk about the market, and he would talk about safety.

4. Communication.

O'Neill was known for speaking to people, not down at them.

The Sound of Market Music

Not surprisingly, analysts and journalists like companies that communicate often and in detail with Wall Street, even when the news is bad. If the management team clams up, that's a negative.

Management should be watching its numbers very closely, knowing what is making money and being fearless in culling businesses that are not.

PepsiCo Inc. was on some analysts' bad dog list after its overseas retrenchment and the spin-off of its restaurant unit (when Kentucky Fried Chicken, Taco Bell and Pizza Hut became Tricon Global Restaurants). But recent acquisitions such as Quaker Oats (including Gatorade) and South Beach Beverage Co. (SoBe non-carbonated new age beverages) suggest a management team once more building on its strengths and staying focused.

There is little or minimal growth in carbonated soft drinks like Coke, 7Up and Pepsi. That market is mature and somewhat static. The growth has been in alternative beverages, such as teas, juices, flavored waters and isotonic sport drinks. Gatorade dominates the latter segment with an 80 percent share, so in late 2000, PepsiCo turned a number of heads by acquiring Quaker Oats Co., the parent company of Gatorade.

It expands its beverage business, which makes sense with its overall strategy. But it is also expanding into a higher growth area in getting a brand that dominates that segment of the market.

Staying within the same category is another household brand that recently took significant steps toward Wall Street redemption.

In 1998, Nabisco started the year off by naming Jim Kilts as its new president and chief executive officer. It was an example of a company going outside to hire strength; Kilts' last assignment was heading the $27 billion food business at a little business south of the Mason-Dixon Line called Philip Morris. At the time, sales of cookies and crackers were lagging. "Oreos are dead," the critics proclaimed.

Or maybe the cookies were just playing possum.

Kilts brought a fresh approach, introduced new brands, new products, repackaged old brands, and now we have Oreos with orange filling and Oreos that turn blue in milk and Cheese Nips crackers that are stamped with popular cartoon characters such as "SpongeBob Squarepants." This illustrates that if a company knows its consumer, it can translate that knowledge into more business.

Not only did Kilts pump up the profits at Nabisco, he also got the attention of an old friend: Philip Morris. The tobacco company purchased Nabisco Holdings for $14.9 billion, pairing its brands with Philip Morris' Kraft Foods, Jell-O, Oscar Mayer and Maxwell House coffee lines, among others.

And once the merger dust settled, Kilts went to Gillette as CEO, where you can bet analysts took a fresh look at that company because of what he accomplished in the past.

Old Brains, Young Bods

The younger the company, the more influential the top executive will be.

A top executive in a large, well-established company, depending on his style, is a person with a lot of power. But in a larger company, part of the power of the chief executive officer is the restraint that he may use in exercising his power.

It is a subtle thing, to be sure, but an overly aggressive CEO who oversees a large and complex organization plays to a number of constituencies. In a smaller, embryonic company, a successful executive is typically a hands-on manager. He understands the business and the niche that he is creating and is not as likely to compromise with individuals in his organization who may not completely embrace his view. That's why you'll see a much more direct role for the CEO in smaller companies. It is just common sense.

There are cases where, through proven judgment over a long time, boards and investors alike will grant a considerable amount of power to a chief executive like Walt Disney's Michael Eisner or former GE boss of bosses Jack Welch. That is a subtle kind of added power and is an enviable position to be in. But Welch didn't exercise that power by being a particularly extroverted or demanding person. The successful executive in that environment has a different leadership role than somebody in a more dynamic company that is younger.

A successful financial record will define management. You don't usually find companies with poor financial records being praised as being well-managed, and yet the personalities of some of the people who lead those companies can be quite dynamic and capable. It is not necessarily that they are bad managers, they just may be trying to manage a business that has a bad business design model.

In the Internet space, in particular, there were probably some pretty capable people building non-functional companies or trying to execute a non-functional business plan. Just common sense might tell you that some of these things were not going to work. During the road shows for some Internet IPOs ­ when executives and their investment bankers connive to sell their nascent stock to institutions ­ many managers seemed to be capable communicators and intelligent people. But they left many observers with big reservations about whether their business models were viable. As far as management is concerned, if you do not have a viable business model, it doesn't make any difference how smart or capable you are. You may not be a bad manager, but you are not going to be able to make it work. Management plays that big a role.

Look for good companies where you think management has a clear and crisp game plan for capitalizing on opportunities in its industry. Can managers execute that game plan? Is there evidence that they understand what they are doing and are executing a game plan that meets expectations, if not beats them?

Total Quality Management (Is Not Subjective)

As the mouth freshener commercial once put it, you only get one chance to make a first impression. That's why the people representing a company to the world can make or break it.

"People come to us to present their companies," says F. Drake Johnstone, a research analyst and first vice president for Davenport & Co. LLC in Richmond, Va. "I remember one guy. For some reason, I had the impression he was in investor relations. Turned out he was the CEO. But he came across like a snake oil salesman. He overhyped the opportunity, and my immediate reaction was distrust. As it turned out, before he came to us, he had been involved with another IPO and had completely overhyped and screwed up that opportunity."

The quality of the people running a company is not just about the CEO. Management does everything. It is the CEO and it is the company's ability to attract and hold onto people.

Monitor the velocity of people coming in and out the door of the executive suite. If you're catching a breeze from how fast and often it swings, move on.

Then there are the fuzzy things. Is it a good place to work?

Do people in the organization know the direction the company is headed and for which it stands? If you are looking at a company from the outside in, you can talk to the customer service people. Do they get what the company is about? Do they reflect its purported goals and attitude? If you are inside, is the top connected to the bottom? Do people feel like they are part of a team, not just in a soft way, but in a "we know where we are going" way, and do they act in that direction?

How do you know when management isn't connecting with its own work force?

You can see it if management is talking about one thing but the rest of the organization operates independently. From the outside, you can actually see the difference between the boiler plate communication and what is really happening; there is not a connection. People in the organization feel distant from management. Management is "they," not "us." Those are some of the symptoms. They also tend to be slow at moving around major inflection points when the industry gets challenged.

In 1999, Charles Schwab gave the whole company a day off, investing $5 million in a top-to-bottom reorientation process with a training company called Root Learning. It brought together 13,000 employees at 10 far-flung locations; the usually 24/7 business cut back its services for a few hours in order to communicate simultaneously with virtually everyone in its domestic U.S. and U.K. organization.

This required compulsory attendance from everyone from the latest hires to founder Charles Schwab. It was also a 25th anniversary party for the upstart financial services firm.

The idea was that Schwab had grown so much in terms of the way it delivered services, the type of services and the sheer size of its work force that management wanted to be sure everyone understood and accurately reflected its goals and mission. Everyone from customer service reps to Schwab himself went to central locations across the U.S. and in London for live and satellite presentations.

Board of Education

There have been an infinite number of cases of companies that have quality products and innovative ideas but can't manage their own tremendous growth.

A good board of directors, one with diverse experiences, will apply those experiences, pick up on the company's shortcomings and act early to set it right. But in cases where the CEO appointed a majority of board members and controls the board, it may not act independently. So another area to study is who makes up the company's board? To whom are the directors loyal, the CEO or the shareholders?

Look for outside perspective in a board, people who have the shareholders' interest in mind. For instance, when you see a large number of venture capitalists on a board, that might concern you. Their interests may not be aligned with yours. The VCs might have an interest in unloading a lot of their other positions. So they want to dress things up and make them look good.

Be wary of companies that spend millions on consulting firms, announce the results of a study, and then fail to implement its recommendations.

"That is why the second page in most of our proposals says our job is to help you do it, not do it ourselves," says Gary Neilson, a senior vice president of the Booz-Allen & Hamilton consulting firm in Chicago. "There is no value in doing it if it is just a report."

Track Records

Look at management's pattern of results. Did it meet expectations? How good is it at forecasting? These are the basics of running a business. How good is it in exercising control over its business, directing resources in the right way and managing sales and distribution?

This area is not all that mysterious. It is about the fundamentals of good management, which aren't always apparent.

Do managers have a clear strategic direction that is practical and that is translated throughout the organization to everyone who needs to make decisions?

The rational act or model is that people in the organization act rationally and people don't make stupid decisions out of context. Management may look and say, "Gee, Larry didn't make a smart decision here." But that's because of the context Larry has. If management gives him the context as someone who is in the middle of the organization, then he would probably make a right decision, or at least a better-informed one.

Management needs a system that ensures follow-up, which means that there is cultural accountability for actions. If someone promised to do something, he or she needs to do it. "I have found in company after company that people promise things but don't quite do it," Neilson says. "The companies that hold themselves accountable can really make big improvements."

Changes in the Weather

In a competitive environment, seek out a company that always sees changes ahead of it and makes changes before the future arrives. But be warned: The typical company operates like most people do, making changes after it is too late. They react to swings instead of causing them.

An attribute of winning companies is that they are market-driven. They anticipate market changes and market requirements, then anticipate how the market will respond to their moves and to competitive moves. Being market-driven is about being better than the competition and understanding, attracting and keeping customers.

It sounds simple, but few are really good at it, because the way they move and act is embedded in their culture, whatever it is they are good at doing. Most companies are not good at understanding their markets or competitors. Consequently, they're equally ill-equipped at then acting on that information, anticipating where the market will go. The winning companies are those that can build close relationships with their best customers and treat them and each customer differently. But few organizations are set up to do that. They don't have the systems, the organization structure or the culture.

And without those, good luck finding a company with the capacity to implement changes. That stems, fundamentally, from the quality of leadership, the experience of the top management team, the cohesiveness of that unit, its ability to create a vision and get people excited about it, and most importantly, to get the right people in place.

At Cisco Systems, President and Chief Executive Officer John Chambers is widely credited with doing an excellent job of staffing his organization.

The heart of the problem is spotting the less obvious visionary organizations. But you can certainly look at track records, and that is why stocks often get a bump when a company such as Home Depot hires someone like Nardelli, who has a proven track record, is a proven motivator and has demonstrated strong judgment.

Skin in the Game

Does it matter if the men and women running a company own a piece of it? Are they better managers if they are incentivized through an ownership stake?

Nobody knows for sure.

"There are situations where we found great investments where the top guy did not have a stake," says Joe LaManna, "but generally, there is a correlation. The more vested interest that they have, their interests tend to be more aligned with the shareholders."

Analysts and consultants alike say they prefer seeing management with some form of equity stake, either through cash investment or compensation packages with substantial option payoffs.

"I want them to have skin in the game," says Budd Bugatch, a senior vice president at Raymond James & Associates in St. Petersburg, Fla., "and I want them to have skin in the game more than just options."

Finding examples where it makes a difference is tough, so consider this a philosophical discussion. The motivation of management is important. Management's motivation should be such that its interests are aligned with yours. It sounds obvious, but it isn't; it sounds like common sense, but it's not uniformly accepted.

Some analysts believe having skin in the game is less important in established, large public companies. In companies such as IBM and Cisco, no one can own a huge share. But they say it definitely counts for something in development phase and start-up companies. There, skin is a very important driver.

A company run like a private business may be run more in its self-interest than in the public shareholder's interest. Pay attention to that.

"I just want to see that they are hungry," says Gary Balter. "The poorer they are, usually the harder they work."

Another positive in the skin scenario is an executive whose compensation package is more focused on options and stock than cash. And where there's smoke, there's you-know-what. If the CEO is options-focused, the board of directors may also be so incentivized.

The difference between an agent's mentality and a principal's mentality permeates every decision they might make. Look for principals as opposed to agents.

The principals of the National Bank of Commerce in Memphis own a lot of stock. Tom Garrett sold his last business before joining National Bank of Commerce as chairman and reportedly invested most of that money into National Bank stock. It has done tremendously well since then.

Some of the banks with growth issues over the past few years, such as First Union and Bank of America, weren't concerned about issuing new stock for an acquisition. The management of a bank where management owned a lot of its own stock would have cared greatly. These other companies gave away their stock too freely.

A typical bank management team may hold less than 1 percent of its own stock versus the individual managers at National Bank of Commerce, which average in the high teens.

When a CEO is given options, that is one thing. That is fine; it does align his interest with shareholders somewhat. When a Tom Garrett invests his own cash in the company, that takes risk sharing to a different level.

If his options go under, well, it's money he would have counted on later on. It's not the same as personal assets put at risk.

A principal is always more careful than an agent in prudently using capital to expand. In a lot of ways, it is hard to measure what a good use of capital is to an outsider and certainly an individual looking at a company. Let's say that two banks merge. Bank A, which has $10 billion in assets, buys Bank B and its $5 billion in assets. Bank B, the one that is being sold, will contribute roughly one-third of the assets to the total company. Is it getting more than one-third of the stock of the total company? If the merger numbers are grossly out of line with that demarcation, you might wonder if Bank A was prudent in issuing all those shares or paying that much cash. That is one of the real keys to a company's long-term success, but it is one of the most difficult to measure, too.

Even very good companies may not avoid the temptation of self-ingratiation when a merger takes place. Legally, management could claim a change in control and therefore have a large compensation check go to themselves.

It should create a question in the back of your mind about their motivation. In some of those cases, even though an executive has a contract that allows him to be paid $100 million, it takes a man of a different ethical view to say there really wasn't a change in control. And there have been cases where managements turned back money to the company because they felt the compensation just by accident ended up being more generous than it needed to be. That would be a positive for investors.

CompanyGreenhouse is in a terrible industry, but it is probably the best company in that industry. Yesterday, the CEO of CompanyGreenhouse bought a half million dollars' worth of his own company's stock. Over time, history shows he has been a pretty good buyer and a pretty good seller of his stock. An analyst would look at that and say, "It is a good trade as opposed to a good ownership."

At office furniture maker Herman Miller, each senior manager is expected to own a certain percentage of company stock. If he sells it, he loses the right to get his options that year. That's an interesting governance criterion for analysts and investors alike.

A somewhat obscure $4.2 billion Carthage, Missouri, company that you probably have never heard of, Leggett and Platt Inc., is a diversified industrial manufacturer that produces everything from bedsprings and recliner mechanisms for furniture to retail store fixtures for Barnes & Noble, Starbucks and Blockbuster Video. The company, which has enjoyed 30 consecutive years of cash dividend increases, initiated a policy four years ago in which the top 20 members of management can defer any or all of their cash income into stock options in any year. And they do, to the tune of millions of dollars every year of cash compensation going into low-priced options. Felix Wright, the CEO of Leggett and Platt, hasn't collected a full paycheck in years. Neither has Chief Operating Officer David Haffner. Wright sells stock occasionally but jokes that's because his family must go to the grocery occasionally and they don't take scrip.

Herman Miller and Leggett and Platt executives have their skin in the game. It is never a for-sure metric, because, remember, any industry can overwhelm you at any time, but you'll know that at least their motivation is right. They will not try things that will mess up the public shareholder.

Options this year may not mean anything, but when the price of the stock is going up, options motivate.

On the other hand, if you look at furniture retailers such as Heilig-Meyers or Levitz, their managements didn't have their skin in the game to any significant degree, so they run their companies differently.

A steward is a CEO who gets stock and options but doesn't have an equity tie-in. It is different than when you have a CEO who is either incentivized directly to the performance of the stock or is an out-of-pocket owner.

Linda Leiberman, a longtime paper industry analyst, believes that equity ownership would have brought greater performance to her industry over the last generation. The proof, she says, is found in the companies where the top managers were also owners.

"When Consolidated Papers was finally sold to Stora Enso for a big multiple," she says, "George Mead and his family was a big owner of that company and they did well for their shareholders. When Federal Paper Board was sold at the top of the cycle to IP, Jack Kennedy and his family had equity in this company, and yes, it was their father's father's business, but there was equity there. So I think the equity tie-in is key to the ultimate performance and the driver of performance."

There is an array of opinions. Some people think that a new management team should borrow heavily to buy the company's stock as a sign of confidence. But do you really want these people in debt? Options may create a greater commitment to the success of the company.

Executives with annual bonuses are being paid for their past but may lack a commitment to the future. If they have options, it is usually because their salary is not so large. In other words, their compensation package is tilted toward the options, and that is the future of the company.

Tupperware recently gave stock to its management. Is that important? Yes, but . . . The company gave management favorable loans to make those purchases. "I didn't consider that to be skin in the game," Bugatch says. "It's not the same thing. So you gave me a forgivable loan to buy the stock. They really don't have their guts in the game."

Skin in the game is just one of the things you should look at. There are also, of course, examples where companies have collapsed; there are Internet companies where the top people had major vested interests, and it didn't work.

Armstrong World had governance requirements that called for senior executives to own a certain multiple of their income as stock. Unfortunately for all of its investors, because of asbestos litigation, Armstrong World filed for bankruptcy.

So skin is not something that necessarily leads to success. But analysts still interpret it on face value as a favorable metric.

Cult of Personality

Being in a sector or category in which you have confidence is comforting. Like the business, like the category. Believe it is the sound place, the right place to be.

But there is a whole part of the market that will trade a stock just because a certain person takes over the company and everyone likes him or her. Until their first meeting and decision, investors will be euphoric.

Helen Murphy, the former CFO of Polygram Music, took the same position at Westvaco Corp., a producer of packaging, paper and specialty chemicals, in February 1999. Westvaco stock went up with Murphy at the helm. The old-line industrial company hired a woman from Polygram. What was she doing at Westvaco? But all of the sudden, there was a positive change. Her enthusiasm was contagious. Of course, eight months later, Murphy bolted and took the CFO position at Martha Stewart Living Omnimedia, and that was the end of that. (But not for Murphy, who 16 months after that spread her love by rejoining the music industry as executive vice president and CFO of Warner Music Group. And where she stops, nobody knows.)

Jay Walker, founder of Priceline.com, is an example of someone who people found very captivating. He wasn't a snake oil salesman, but he mesmerized analysts and investors alike.

That was not necessarily a good thing.

Not every company needs a high-flying entrepreneurial type like Virgin's Richard Branson at the helm. In fact, a Branson might not be as effective in a stodgy industry such as utilities or paper.

If a company is to be dominated by the cult of personality, it has to be the cult of performance, too. You want managers that bear all the characteristics of who you would want as a business partner. They should run an ethical business, do it the right way and be tough competitors. A great example is the World Series. You want to be with the New York Yankees. These guys have the killer instinct, but they do it with class and they don't break any rules. That is what an investor wants. You would want the same type of bulldog culture in a company that you own.

Jack Welch is probably the corporate equivalent of Yankees' manager Joe Torre. Wherever he goes, he will be a winner.

In investing, there are no shortcuts. Following a CEO on blind faith from company to company is a little too easy. There is usually more to it than that. But there is such a thing as a winner. If Arthur Blank, the recently retired co-founder of The Home Depot, turned up at a new company, few people who put their money on him for 20 years at Depot would think twice about laying that bet again. The Home Depot was a company with a good idea that was always well managed. Blank and Marcus kept thinking and fine-tuning it.

If you heard that Welch was moving on to a different company, is he the kind of guy for whom you would want to work? If so, maybe he is also the kind of guy you would want to invest in.

Not only that, you would want to take a good hard look at the companies these people are leaving, too.

Why would you join Microsoft? You would join it because of Bill Gates. Why would you join Apple? You would join it because of Steve Jobs. You want a leader who has done it before.

You join a company when the leader has a good reputation. If you joined IBM, you would probably join it because of its chairman.

Sometimes it is a combination of a special chemistry between the individual and the company, and when the key personality leaves the company, it dies. Some people can make things happen solely by their presence and its impact. Think of Ronald Reagan. Roberto Goizueta. Sam Walton.

A CEO has a substantial impact on a company, even on big household name companies with tens of thousands of employees. There are CEOs who absolutely ruin big companies. The reins can be handed off to the wrong person, and it is remarkable how quickly it moves all through the company. By the same token, there are enlightened CEOs who surround themselves with bright people and whose companies flourish and turn around.

You don't have to like a CEO to jump on his bandwagon; people just have to think, "He has a magic touch; he will fix everything." But that's a dangerous way for most people to make investment decisions.

You can't just invest because of one person. He may have an impressive track record, but you should understand what is going on with the company, too. What are the issues facing the company? Is it the culture? Will he change the culture? Should he?

There are people like Citigroup's Sanford Weill, who is unique and who would have an impact wherever he might go, but there are very few people of that nature in the financial business. The industry is too huge, too monolithic; institutional structure tends to be more important than individuals.

James Dimon, chairman of the board and CEO of Bank One is another ­ he was once an up-and-comer under Weill ­ as is Bank of America's chairman of the board and CEO Hugh McColl.

Leaders such as Christos Cotsakos or J. Joe Ricketts, who run E*TRADE and Ameritrade, respectively, would have a big impact if they went somewhere else because they are builders. Other leaders are not necessarily builders, but they help their industry grow.

John Chambers absolutely died early in his career. He ran computer pioneer Wang Laboratories and laid people off for two years straight. He vowed, "Never again in my life will I go through that." That made him tough. He may be a soft-spoken Virginian, but he will rip your throat out in competition. That is what you want. But can you say for sure that Chambers can replicate what he is now accomplishing at Cisco with another company? Steve Jobs came back to Apple and turned it around. Key people are absolutely critical to making organizations work, but you can't throw money at them on blind faith. You should be convinced it is a good fit, not that you think the guy is good and he can fix anything. That doesn't work.

Bernie Edwards at WorldCom is an example of how it cuts both ways. When things were going great and he bought MCI and the industry fundamentals were fine, investors fawned all over him. They liked his attitude and everything else. But when things went badly for WorldCom in late 2000, Edwards said, paraphrasing, "The board may have to hire someone else..." He was humble and beaten-down.

If you have been highly regarded for a long time and have a rock star following and all of a sudden you fall off a cliff and say publicly, "I really screwed up. Maybe someone else is better to run the company," what does that tell shareholders? Talk about reducing confidence in the company.

The cult of personality is a double-edged sword. If things are going great, maybe it helps the company. If someone really does have substance as a CEO and is a true rock star, when things hit the fan, he doesn't put his head between his knees and kiss his ass goodbye. He should say, "This is what happened, this is what we will do to correct it," and he should keep a positive attitude about it.

Another example of the rock star mentality is C. Michael Armstrong, AT&T's chairman of the board and chief executive officer. He came in with a blaze of thunder and lightning, but the long-distance industry imploded and its dynamics changed. To his credit, some say, Armstrong stuck to his vision on cable and wireless despite the fact that walls were crashing down all around him.

Maybe the fact that Armstrong enjoyed rock star status explained why AT&T's stock went up more than it should have when he arrived and subsequently fell harder. There may be more volatility with a CEO who is at such a high personal level of adulation.

Joseph P. Nacchio at Qwest is another chairman and CEO who is quite the bantam rooster. Talk about a unique personality. Qwest made a bold bid to buy US West. And while that merger was pending, Nacchio actually approached Deutsche Telecom, trying to sell Qwest to it. He allegedly did that without even talking to the head of US West. That, not surprisingly, upset US West. Deutsche Telecom actually came up with a price to combine the companies ­ Qwest/US West with Deutsche Telecom ­ that was far better than the ultimate result, but US West said, "No, no, no, that would delay the merger. We are not going to do that."

Many analysts didn't care for Nacchio's handling of the merger ­ even those who liked the strategy itself.

"When I saw that behavior, I thought, 'This is nuts,'" says one. "If I see behavior that I think could erode shareholder value, I am not going to sit on the sidelines and not say anything."

The business media is an important factor in the creation of the CEO cult.

CEOs are particularly important in aggressive, entrepreneurial growth companies. These are not businesses that run themselves, and rallying the troops is crucial. People who have a cult-like personality run many of these companies.

Sometimes it's good to have a CEO who gets everyone in the organization motivated and moving as one. In these situations, the boss is frequently referred to by just a first name: Jeff (Bezos, Amazon.com); Bill (Gates, Microsoft); Bernie (Marcus) and Arthur (Blank, both of The Home Depot); or Phil (Knight, Nike). It works to a point. What we then look for is the shift. Can that CEO adjust from the early, wild-eyed entrepreneurial era of go-go-go into an era of mature professional management? It requires a different skill set. It is pretty rare that the same person has both.

An offshoot of the cult of personality is the idea that people attached to great companies can bring some of that fairy dust to new endeavors. But that concept doesn't always pan out.

Take the people who leave Wal-Mart, for example. How many of its ex-execs built strong companies once separated from Sam's mother ship? Wal-Mart is an institution. The people within the company aren't necessarily the smartest people in retailing, but the structure is so strong and the culture is so strong that it drives them to a level they can't reach in another company. When they leave that culture, it's like giving up a crutch. You have to either walk or crawl, and many Wal-Mart escapees wobble upon departure. People at lower level that were running Wal-Mart divisions and looked like superstars go elsewhere and are often far less successful.

There are any number of instances when, if you bet on a CEO changing horses in midstream, you would have been a genius. You would be equally wrong in just as many examples. The immediate example that comes to mind is the myth or the theory that anybody who leaves GE will automatically turn around whatever company he or she goes to. That myth gained credence when Larry Bossidy left GE for Allied Signal in mid-1991. What you should have done right then was mortgage your house and put all your money on Allied Signal; you would have made out like a bandit as Bossidy sold off unprofitable divisions, profit margins increased and he ultimately acquired Honeywell (under whose named the merged company now operates). But in many other cases, former GE people have not exactly set the world on fire. The cult of personality is a little bit of a trap.

It Wasn't Me

With technology-driven products, you can't blame the company. You can't say, "This is Joe Smith's fault because he is not a good manager." At Hewlett-Packard, CEO Carly Fiorino is struggling, but she hides behind the technology as being the problem, not her management.

In retail, there is no technology. It is all about how strong a manager you are. So when an analyst says, "Home Depot is a good stock," he or she is essentially saying, "Bob Nardelli knows what he is doing."

Thomas G. Stemberg, chairman of the board and CEO at Staples, is a brilliant but difficult manager by many accounts. He also is one of those people who will allow his associates as much rope as he can without letting them hang themselves. That created some very loyal people below him and helped develop the company. He also knows his own limitations. He recognizes that his strength is strategy. He can figure out what markets he should be in in terms of overall office supply, what sectors to be in, and how they should compete. But day-to-day operations is not his expertise. He has to leave the day-to-day to somebody else, and he has done that for the last 12 years. At the other companies in his category, Office Max and Office Depot, his counterparts rolled up their sleeves and became involved in every decision every day, and they never grew the way Staples did because they didn't bring in professional management.

Shareholder Value

Some people may actually think they know what shareholder value means. It is used in many different contexts, as when a company announces, "We have retained the firm of Tell-Um-Little and Bluff-Them to explore all opportunities to increase shareholder value." What does that mean? It could mean they will fold the company, liquidate it, merge it, or find some rich guy who can pump some money into it. That doesn't tell you anything.

Shareholder value is a nice catch phrase ­ everybody says, "We are trying to enhance shareholder value." But does it really mean anything?

Investment bankers want companies to "enhance shareholder value" by putting fees in their own pockets. That is the investment banker's version of enhancing shareholder value.

Enhancing shareholder value for the rest of us comes down to running a business in a straightforward and consistent manner and making no return. That will enhance shareholder value. Will there be times when the market will value a company more highly than other times? Absolutely. You can't control that. Mr. Market will be irrational and cranky from time to time. On the other hand, if the company generates consistent growth and earnings ­ real earnings and real revenues ­ over time it will be more highly valued.

The importance of enhancing shareholder value in a publicly held company should be a given, but it's not. There are many people with different agendas. Look at indications of how executives are paid and what decisions they make. Many years ago, buried in the company's filings was the revelation that senior management at CompanyGreenhouse was paid based on revenues. The CEO made a lot of acquisitions that were dumb because he convinced his board to pay his bonus based on revenues. So when he bought an $80 million company that was worth $40 million and paid $60 million, well, he got his, and unfortunately, the shareholders got theirs, too. They weren't marching in the same direction.

It also depends on the development stage of the company.

When CompanyGreenhouse hired a new CEO, he said to his senior managers, "Okay guys, here is our budget. We are going to make a million dollars next year; that is our budget. If we make $1.2 million, I am going to take half of that two hundred thousand dollars and divide it among the partners as stock. If we make a $1.4 million, I am going to take half of that and split it among you." All of a sudden, given a chance to double their income, it was easier for managers to fire people. Before, managers would have kept the dead wood on board doing paperwork. The dollar incentive worked and created some of CompanyGreenhouse's biggest profits ever.

Every year we hear of companies giving executive bonuses despite the company's profits being in the toilet. But we also hear of companies that say, "This year, our CEO didn't get a bonus."

One company in Australia tied its management bonuses to their performance versus a stock price index. So if it is in the top 25 percent of companies in stock price performance, in terms of total shareholder return dividends and stock price appreciation, management gets 100 percent of its bonus. If it is in the 50 to 75 percent range, they get 75 percent of their bonus. If they are between 25 and 50 percent, they get 50 percent, and if they are at the bottom quartile, they get zero.

They get zero bonus, and they are probably looking for work. But remember, 25 percent of all companies are always mired in the bottom quartile.

Performance Ethics

At Booz-Allen & Hamilton, consultants analyze client companies based on a "performance ethics model" defined in six pieces.

1. How clearly stated is the organization's vision of where it wants to go? How deeply ingrained within the organization is that vision? How deep down into the organization is it understood?

2. What are the specific goals that the organization defined for itself in order to achieve that vision? What are the milestones that it laid out?

3. Who has what accountability to achieve those milestones, and is that clear? And if it is not clear, then by definition, the company does not have an accountability system.

4. How effective is the company's reporting process? Is it tracking things it needs to track in order to measure whether it is making those milestones?

5. The flip side of reporting is the feedback system. How are the CEO and CFO looking at the performance of their units? Are they also comparing their plan with competitors and other external benchmarks?

6. Finally, does the company have a consequence management system? What is the nature of their consequence management system? If it meets its milestones, what happens? If it doesn't meet them, what happens? How are bonuses defined? Do managers get them virtually independent of performance? If they perform well but destroy the people pipeline in the process, what is the nature of the reward?

Mundane is Beautiful

Sometimes we find great investment ideas in fairly mundane businesses.

Two business services companies, Paychex Inc., a small and medium-sized business payroll and human services provider based in Rochester, N.Y., and Concord EFS Inc., an electronic commerce provider in Memphis, Tenn., made their respective marks through great management and day-to-day execution. They are tremendous growth vehicles that became tremendous investments.

Payroll processing is not a sexy business. You wouldn't think of investing in a company in that arena and making 100 times your money over 10 years, but Paychex rose 100 times over the last 10 years. And it is not one of these one-time pops, either. It is not like you had to be there in the first year after the IPO or you missed the whole thing. If you look at a 10-year chart of this company, it will bring a tear of awe to your eye.

But if a company is not being as sexy as a technology company, it tends not to get a 200 percent move in one year. Its earnings may not double every year, but it will likely be consistent.

Speaking of mundane, Charles Schwab put a human face on an industry that was, well, faceless at the time. He became a well-known figure through the advertising and the marketing of his company name. Think of the disdain that the average consumer has for most corporate executives, and yet the perception of Schwab himself is always positive. He is virtually a folk hero, an executive for the masses. He took a business that once charged outrageous fees and made investing affordable for the average American. He had a profound impact on the markets themselves, above and beyond his own company, because he made investing easy, understandable and user-friendly.

Look for companies with not only great management but that have consistent growth potential, predictable earning streams, high return on investment, and the ability to control pricing. Tech sometimes gives you rocket ship investments, but you better get out before the rocket ship crashes. A long-term investor can make a hell of a lot of money in dull stocks.

A generation ago, the full-service brokerage business was a nine to five business. Now, the busiest time at Charles Schwab, other than when the market is open, is Sunday evenings. It receives heavy phone volume when the weekend is almost over and parents put their kids to sleep. Average folks spend Sunday evenings sorting out their financial affairs and deciding where to put their money. Charles Schwab made that possible through 24-hour-a-day, seven-day-a-week service that allows access either online or by telephone. We forget that that didn't even exist 15 years ago.