The Departure of Sir Martin Sorrell

At last the highest paid and longest serving FTSE-100 CEO has departed from WPP after 33 years. His total pay last year was £48 million, down from the previous year’s “single figure” of £70 million. Sir Martin was certainly perceived to be a “star” businessman, and the financial performance of WPP pleased shareholders for many years. Despite recent problems the Annual Report of the company claims a Total Shareholder Return of 1,006% over the last twenty years as against a measly 241% for the FTSE-100.

Will the company find a suitable replacement manager who can continue to grow the business? Will the company survive in its current form or be broken up? Those are the questions all the media are pontificating upon.

My thoughts on this subject were crystalized by reading the business management classic “Good to Great” on a recent holiday break. First published in 2001, the author Jim Collins reported on research he had undertaken to determine what separated out simply “good” companies from the “great” ones, i.e. those that really offered investors superior returns rather than average ones. He also looked at what turned good companies into great ones, i.e. the crystalizing factors or turning points. It’s well worth reading by investors for that reason alone, even if some of the companies reported on as “great” have subsequently gone bust (e.g. Circuit City), and amusingly Berkshire Hathaway was only rated as “good” at the time so was not included in the analysis.

Management and the quality of the leadership was one of the key factors identified. It seemed that humble, self-effacing leaders were best. They often attributed the company’s success to luck or the other senior management team members. Star managers with high profiles such as Jack Welch at GEC or Lee Iacocca at Chrysler frequently proved to be shooting stars whose achievements rapidly disappeared after they left. In other words, they did not build great companies where their legacy lived on after their departure.

This is one very applicable quote from the book when you are considering director pay in companies: “We found no systematic pattern linking executive compensation to the process of going from good to great. The evidence simply does not support the idea that the specific structure of executive compensation acts as the key lever in taking a company from good to great”. In other words, high pay does not generate exceptional performance in managers, and schemes such as LTIPs which allegedly align managers’ interests with shareholders do not help either.

It’s a book well worth reading for tips on how to identify the companies and their CEOs that are likely to generate great returns for investors.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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