This week’s post is about esoteric investing philosophy and decision-making using two CEOs as comparables.
Last week, I wrote that it is necessary to invest strategically, particularly in investments that are difficult to quantify (although I would rephrase that specific point in my last post, the spirit would remain the same). It is on this point that I would like to explore further this week by using the allegories of current Amazon CEO Jeff Bezos and former Enron CEO Jeff Skilling.
Jeff Bezos was a New York investment banker when he saw the potential of the internet in selling books. Quitting his job and moving to Seattle in 1994, he founded Amazon and became a pioneer in the emerging internet retail sector. Under Bezos’ strategy of “get big fast”, Amazon’s popularity and revenues soared. It quickly became the dominant player in its industry and one of the most recognized brands in the world. Investing millions of dollars in warehouses and digital infrastructure, Amazon’s competitive advantages were logistics, order fulfillment, and customer service. In the run up to the dot com crash of 2000, the company still had not posted a profit. During the meltdown, Amazon’s share price decreased from a high of $113 to a low of $15 and the company’s survival was questioned. Even after the company had survived the crash, it would take until 2009 for the company to have positive income.
Despite the volatility in share price and continuous criticism, Bezos insisted that the stock market and the negative income were of little concern to him. Routinely questioned by shareholders, analysts, the Amazon board, and investors, Bezos was adamant that as long as Amazon maintained sufficient cash on hand and was cash flow positive (which is different from being profitable), the share price did not concern him; Bezos knew that he was making the right long term moves for the company. It was difficult to quantify the returns of his investments in digital infrastructure, but he knew it increase the company’s competitive advantage and would pay off handsomely in the future. It was a tough sell to Wall Street, which dissected companies on a quarterly basis and expected quick returns. Bezos was undaunted, always taking the long view, and continued to build Amazon and was recently named the best performing CEO in a recent article by the Harvard Business Review.
Bezos’ long term, value-driven approach is starkly contrasted by ex-Enron CEO Jeff Skilling. Skilling graduated from Harvard Business School and joined a prestigious consulting firm before being lured to Enron by Kenneth Lay, the future chairman of Enron. Skilling revolutionized Enron by creating not only new departments, but new economies and industries, including gas trading. He rose through the ranks of Enron and became its CEO. However, Enron was built on unethical and illegal conduct, such as accounting fraud, earnings manipulation, and investor deceit. Once the darling of corporate America, Enron’s frauds were exposed in 2001 and slid into bankruptcy. Skilling was convicted of numerous charges and is now in prison.
Skilling’s priorities at Enron were the exact opposite of Bezos. Skilling’s primary focus was on Enron’s share price. Even though Enron had made a multitude of financially terrible but legal deals and was perpetually in danger of running out of cash, Skilling’s obsession was on Enron’s market capitalization (share price multiplied by the number of shares). When walking into Enron’s headquarters, the up-to-the-minute price was prominently displayed at the entrance. Almost every Enron employee had the ticker on their desktop and it was said that Lay was euphoric when the price increased and near catatonic when it decreased. Skilling loathed hard, cash-producing assets and was never focused on anything beyond the meeting earnings targets of the current quarter; his focus was on short-term earnings.
Given the fate of both men and both companies, it’s easy to side with Bezos and his focus on the long term rather than share price. However, in the 1990s, virtually everybody would have sided with Skilling. Enron was named the most innovative company in America five years in a row and provided returns to shareholders well beyond that of Amazon. Quantifiable and concrete returns, although not known at the time and fraudulent in Enron’s case, are better than investments in “strategic infrastructure”. Share price is what the market watches, not long term initiatives. By the rather strict scope of this brief case, Skilling’s priorities were proven wrong.
Next week’s post will extrapolate lessons from the experiences of Bezos and Skilling and adapt them to a personal, rather than corporate, perspective. Until then, try to draw your own lessons and we can compare notes.
PS There are those who question Bezos and if Amazon can actually be a supremely profitable company. Like any public figure, Bezos does have his detractors and this post does not endorse or challenge Bezos’ overall performance as CEO. This post restricts itself to each CEOs internal metric of performance, with Skilling lauding share price while Bezos downplaying it. It’s not difficult to condemn Skilling, but it does not necessarily mean his focus on share price, and hence short term shareholder value, is wrong.