036: Invest in Leaders

Invest in Leaders

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Color Commentary


Table of Contents

1. It’s Rough Out There
2. Lowe’s
3. Merck
4. Tapestry
5. Broader Mission
5. Let’s Get Practical


1. It’s Rough Out There

It’s been a really rough week because of the news about George Floyd, Breonna Taylor, and others, as well as the threat to Christian Cooper, on top of a very rough half-year for all of us. I’m also devastated for the small business owners, many of whom are Black, who have been fighting to stay in business through coronavirus lockdown and now face looters. What really can I say that would be helpful? I have written several versions of this issue and decided that better than me trying to insert my own experience is to turn to an actual expert on racial inequality.

Bryan Stevenson is a law professor at my alma mater, NYU Law, and he is eminently smart, thoughtful, and reasonable (and a great speaker, if you feel like watching his massively popular TED talk). He’s also the founder of the Equal Justice Initiative. His recent interview with the New Yorker offers valuable perspective on why so many people are so upset, why the overwhelming feeling is one of angry exhaustion, and, at a time when many of us are asking ‘what can we do?’, even proposes systemic solutions. It’s worth your time.

I have been ruminating on how investing practice fits into the high emotions and outrage many of us feel right now. Does investing practice relate to this situation at all?

Investing relates. Of course it does. Please.

Investing is an effective instrument we have to vote with our money. More than that – money, including investing, is the language of the status quo. It’s the language those in power understand. On first thought, public markets and investing money seems awfully far away from grassroots peaceful protests, but I would argue it is a powerful tool we each individually can wield within the system. It’s a tool that is proactive and long-term, and most importantly, it’s a way we have to communicate that is constructive, rather than destructive. Black leaders in business have been telling us that message this week (as detailed below) and we should listen. Investing is, in many ways, a superpower, and I’d suggest we wield it.

There are a lot of ways to make change, but there are two ways that seem obvious to me and are easy for us to do in our investing practices.

1. Become more aware of companies with black leadership and ownership

2. Become more aware of companies that support social justice Missions, whatever that means to you.

I’ve used the words “become aware” instead of “invest in” above, because a company still must meet all of our standards before being a true investment, including being a sensible price. It’s not a small action, however, to make sure I know which companies are run by CEOs who are not white men and then make sure I look twice at them during my research process. Who knows, maybe a winner will pop up that might have otherwise gone overlooked.

On the first, to become more aware of companies with black leadership and ownership, I particularly look for women and minority CEOs in my personal investing practice. There are only four black CEOs of Fortune 500 companies. All men. Four, out of 500, is less than 1%. .8% exactly. By contrast, there are 37 women CEOs in the Fortune 500 this year, three of whom are not white. That’s 7.4% women. We’ve got a long way to go.

Those Fortune 500 companies run by black CEOs are Marvin Ellison, Lowe’s (LOW); Kenneth Frazier, Merck (MRK); Jide Zeitlin, Tapestry (TPR), and Roger Ferguson, TIAA (a private insurance company).

I took a look at the Missions of those three publicly traded companies.

2. Lowe’s

Lowe’s Mission: “Together, deliver the right home improvement products, with the best service and value, across every channel and community we serve.” (Source: 2nd page of 2019 Annual Report.)

Take a look at the photo of the CEO on the third page of Lowe’s annual report, at the beginning of his shareholder letter. CEO’s usually wear business suits in their photos, right? Yet, Marvin Ellison, the CEO of Lowe’s, is wearing one of those vests that all the store servicepeople wear in his official photo. That is absolutely the coolest thing. Way to identify with the employees. I LOVE seeing that in a CEO. Of course, Ellison made $11.6 million last year, which was right in the middle of CEO pay according to the Wall Street Journal’s survey, so he’s not exactly a man of the people, but still, good for him for identifying himself with his employees to investors.

Lowe’s wasn’t doing so well against its main competitor, Home Depot, and Ellison was brought on to turn the company around. It’s starting to look like he’s succeeding, and I found this article about the role Google Cloud has played in Lowe’s being able to offer omnichannel shopping quite interesting – both about Lowe’s, and about the cloud wars between Google, Amazon, and others. I’m fascinated by how our shopping methods are changing in real time, and perhaps Lowe’s is finding the sweet spot in the mix of online and in-person shopping. A home improvement store is a particularly good case study for the future of shopping because its products are the sort of thing we like to look at in person, to touch, to get a sense of the size and weight of a tool or bolt, to look at a paint color actually in the can, to sit on a deck chair, or to choose exactly the plants I want for my garden. Furthermore, the hidden value home improvement stores provide is in the expertise of its servicepeople to give advice on my project. There are a lot of reasons for customers to go the store in person. Equally, once I know what I want, it would be really convenient to just buy it online and go pick it up curbside in one hour. If Lowe’s can hit that sweet spot, it’s going to do really well.

Ellison put out a nice message on Twitter and to his employees about racism, and I hope to hear more from him about what the company is doing in that regard. Lowe’s would be an excellent place for apprenticeships of the type Kenneth Frazier of Merck talks about in the interview I link to below. I was also intrigued to note that Ellison bought $1 million of Lowe’s shares when the company’s stock was around $100 in March. I love seeing a CEO put his own money behind his company. When it’s $20-40 thousand, which I see sometimes, then that purchase is just to get a good headline, but $1 million is real money and, to me, is a sign of integrity. It’s good to have skin in the game.

4. Merck

Merck’s Mission: “To discover, develop and provide innovative products and services that save and improve lives around the world.” (Source: Main company “About” page.)

Merck is a huge pharmaceutical company whose stock is still below where it was before coronavirus hit, which is rather interesting in a world obsessed with antiviral drugs and vaccines. Often overlooked, though, is that pretty all non-covid-related treatments and surgeries stopped for a few months, and that meant lower revenue for pharma, including Merck. Here is Frazier talking to CNBC about Merck’s search for a covid vaccine.

I kind of love this guy. He’s a lawyer who made his way up as general counsel and made his name defending Merck against lawsuits for an arthritis drug’s side effects one by one, instead of rolling them into a class action lawsuit and paying out a massive settlement. He did so because he didn’t think Merck should pay, and ended up winning many of those lawsuits, saving Merck and its shareholders a ton of money. After that, he was appointed CEO in 2011, so he’s been there now almost ten years. Frazier came out yesterday on CNBC to make a very strong statement on the murder of George Floyd.

Context/commentary from the FT on his appearance here, in which one of his Board members are quoted as saying Frazier does nothing off the cuff – this statement was vetted and planned by many high-ups at Merck, and that means the company and the Board supports him. Furthermore, he answers the question about what companies should be doing beyond the press release, by bringing up young people to give them access to opportunity in business through knowledge and training (this is what I was suggesting Lowe’s could do). And that is a great thought. However, the one thing I wish I had heard in that interview with Frazier is exactly what Merck is doing in that regard.

5. Tapestry

Tapestry’s Mission: “Our company and our brands are founded upon a consumer-led view of luxury that stands for inclusivity and approachability.” (Source: Investor relations homepage.)

Jide Zeitlin is brand-new to the role of CEO at Tapestry, coming from being Chairman of the Board and now serving in both roles. Tapestry is going through a bit of a tough time. Its brands – Coach, Kate Spade, and Stuart Weitzman – have somewhat gone out of favor with shoppers and I think the company is trying to figure out how to shift with the changing tastes of its buyers. I tend to avoid fashion companies for exactly this reason.

Zeitlin recently wrote a letter to Tapestry employees, which he posted on LinkedIn, and gave a strong and emotional interview to a morning show, saying that they can replace their handbags in their stores that have been destroyed, but need to work on social mobility. Again, I wish I had heard what Tapestry is doing in that regard. In his letter, he wrote that Tapestry is coming up with a plan, and I look forward to learning about it. Tapesty did donate $2 million to small businesses affected by coronavirus shutdowns, which I think is a rather extraordinary move for a huge company to support smaller ones. This is one to watch.


6. Broader Mission

Another place to look to see if a company is truly run by a group of diverse people is the Board of Directors, which is, in my anecdotal research experience, usually made up of white men – and occasionally one white women. Two of the three companies run by black CEOs, however, have unusually diverse Boards: Merck and Tapestry. Lowe’s may have a diverse Board, but if they do, they’re not trying to tell me about it. Their website gives very little information about its Board, which always turns me off of a company. The Board of Directors represents shareholders. Tell me who is representing me in this company! A diverse Board doesn’t mean it’s an effective Board, obviously, What it does mean is that there is a diversity of experience and perspective in the room, and IF that Board can innovate and iterate from that experience and perspective (a very big IF), then that is a stronger Board. Stronger Board means stronger company in the long term.

Of course, these three leaders above have already succeeded in rising to the top. What about the many, many, MANY people who are working their way up? That’s where understanding the company becomes really important. Reading reviews from employees on Glassdoor and LinkedIn. Becoming aware of the executive team and when a management position becomes open, what candidate names are floated to fill it? Then, who do they actually choose to fill it? What does the company do publicly when racial issues arise, or do racial issues not tend to arise because the company is proactively working upstream for equality?

On the second point I listed above, becoming more aware of companies that support social justice Missions, whatever that means to you: companies have powerful platforms, and sometimes have large amounts of cash at their disposal. They can make a difference. The danger is virtue signaling for the sake of marketing, not to make real change – which is where understanding the company and taking note of all the ways they make a difference will indicate whether their support is real or greenwashing.

For example, I’m watching Peloton these days, as you know well, and not only have Peloton instructors put out incredibly moving rides about their emotions during this time (obviously, which wouldn’t go out without company support) but the company donated $500,000 to the NAACP’s legal defense fund. It might be for marketing, sure, but that’s real money. Facebook donated a lot more real money, $10 million, to various groups fighting inequality; other companies did as well, amidst criticism for the way many tech firms handle privacy and publishing. I don’t know if any of this will be sustained or if Merck, Lowe’s, or Tapestry will really do much either – and certainly, just because they have Black leaders doesn’t mean they have any more responsibility than anyone else – and for Mission, it’s simply something to watch.

There’s no perfect way to take action as an investor, especially because I am not looking to lose money on my investments and therefore can’t invest in every company worthy of my support. Many would say that what I have written above is not doing enough, and that’s probably true. This is a time for me to listen and learn, not preach. However, I strongly believe in the power of compounding, over time. Those kinds of criticisms miss the powerful effect that thousands of small actions, without notice or fanfare or social media attention, cumulatively have. Taking note of Lowe’s, Merck, and Tapestry may not seem like a lot to some people, but I guarantee you it is a good deal more than most investors do, and THAT level of systemic ignorance amongst Wall Street is part of the problem. I certainly was ignorant. All we can do to change it is change our own behaviors.

There was a great question on our group call this week: how to drill down when evaluating Mission. My answer on the call was that I don’t have a defined method, I just know it when I see it and I try to follow whether what they SAY is actually what they DO. However, I’ve been thinking about it ever since then, and I think developing a Mission-specific checklist would be a useful way to spend some time. The checklist would focus on confirming that I’ve really done the research. I’m going to work on it and will share it when it’s ready, and I encourage you to do the same. Reading someone else’s checklist is exponentially more valuable when you’ve done your own work already and can use the work of someone else to plug holes. Again, the great thing about Mission is that we each get to make our own choices what is important, and I’d like my checklist to lead me not so much towards particular stances, but rather make sure I’m fully aware of what that company and those leaders support.


It’s kind of fun to read down the WSJ list of CEO pay (WSJ paywall) and remind myself that these numbers are for ONE YEAR of work. Oh, did I say fun? I meant INSANE.

Ray Dalio has continued to publish his series on big economic cycles and empires. Well worth reading.

PIzza arbitrage. This is the most insane tale of coronavirus economics. One owner sold himself pizzas, and made $1 per pizza. It also shows how ridiculous the delivery businesses are becoming. “One explanation is that each of these companies have more in common with the disastrously imploded MoviePass than they’d like to admit. MoviePass, which built a massive user base by offering unlimited movie ticket subscriptions at cost, eventually burned out like a dumpster fire when it became clear acquiring massive numbers of customers is a bad idea when there’s no path to actually turning a profit on them.”

Somehow 13% unemployment is great news? Markets typically hate uncertainty. This one we have seems to love it.


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