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Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Another self-promoter reveals his "secrets"
Donald MitchellChairman, Mitchell and Company, Wellesley, MA, USA.
Against the Grain: How to Succeed in Business by Peddling HeresyJoel M. SternPublished by John Wiley & Sons
If you know who Joel Stern is, you may want to read this book. If you do not, you will probably not enjoy the book. If you know and love Mr Stern, the book will add many amusing anecdotes to your own repertory of tales about this peripatetic self-promoter.
Stern was originally known for visiting CEOs and telling them "earnings per share don't count". That was a novel message to CEOs who usually got their bonuses for meeting targets for earnings. Stern would usually go on to explain that the stock market was highly efficient and followed the lead of "steers" like Warren Buffett who knew how to assess the economic effectiveness of an organization's performance. The book contains a copy of an early op-ed piece he wrote to explain his ideas.
Stern wanted CEOs to focus on growing the cash flows of their organizations so that they did not have to reinvest ("free cash flow"). He wanted companies to make more money with their investments and invest as little as possible, but he now characterizes that concept as "heresy". That's strange since businesses have been employing discounted cash flow as a discipline to making new investments since around 1890.
Stern works with his colleagues at Stern Stewart (his financial consulting firm) to turn these concepts into elaborate measures of economic performance called EVA and MVA that adjust for the cost of capital (something that has been around since the capital asset pricing model was introduced many decades ago). Stern also thinks of this as "heresy" now.
Few others than CEOs would have heard of Joel Stern if he didn't constantly teach, speak and write about his work. The book has some elements of Adventure Capitalist as he describes his nomadic life. He first made the headlines when Fortune Magazine put him on its cover in 1993. Why did Fortune do that? The book doesn't tell, but I once asked a friend who is an editor there. Stern Stewart was a tiny firm at the time, and barely breaking even (as Stern acknowledges in this book). The ideas had been around in academia for decades. What was so special? The editor told me that Roberto Goizueta, then chairman and CEO of Coca-Cola, had written to suggest a story on Stern. Since Fortune had never received a letter like that from a CEO, they felt that they had to write the article. The Wall Street Journal later reported that Mr Goizueta typically spent more than half his day writing letters to analysts and publications to get more exposure for his company's stock. Since then, Stern's firm continues to be covered annually in Fortune, and prominent Fortune editors appear at his marketing conferences.
In that story, you have the essence of the book. Stern is a genius at persuading high profile people to endorse him and his work and help promote his career. This began while he was at Chase Manhattan Bank. I first met him in 1975 after the lending officer to our Fortune 200 company suggested we hire Stern to come speak to us. At the end of the presentation after Stern left, his internal sponsor in our company noted that Chase Manhattan did not use his concepts.
Not surprisingly, Stern eventually left Chase to start his own firm in 1982. Since then, his contribution has been to take the two groups of executives in our society who read the least (CEOs and CFOs) and teach them about the financial theory that is taught in every business school in the world. Before you dismiss that contribution, remember Peter Drucker's advice: there is no single measure of company performance that is better than the rest. You should add more and use them all. In that vein, Stern has helped. He now has many competitors who provide reasonably similar versions of the same measurements. If you want to know more about these measures, read The Quest for Value by Bennett Stewart rather than this book.
The most controversial part of Stern's work is a compensation method based on EVA. I was amused to find out from this book that Stern Stewart does not use this method for its own compensation, although EVA is one part of the compensation determination.
If you are interested in how to be a high-profile consultant in the world of finance, you will get a good sense of the type of networking among academia, finance and senior executives that is required. If you want to live that nomadic life, cut off from your family, then the world is yours.