Harvey Golub, CEO of American Express since 1993, announced in 1999 that he did not want to go on working full-time until he was 65 (he was 60). His work was done, “ the company is in terrific shape: robust growth engines have been built; our brand and our reputation are stellar; our people and intellectual capital are outstanding; and our customer base is large and loyal.” (reported in AP News, “American Express CEO Resigns Early”, November 17, 2000)
He allowed plenty of time for the transition to a new CEO. Golub chose, and the Board and shareholder approved, the highly respected Ken Chenault, who had been his trusted No 2 since 1993. He became only the third black CEOs of an S&P500 company in 2001.
Buffett said, in his 2006 letter, that he greatly admired Chenault. He went on to note the different skill set required to run a company compared with being an investor:
“I don’t think I could do the management job they do. And I know I wouldn’t enjoy many of the duties that come with their positions – meetings, speeches, foreign travel, the charity circuit and governmental relations. For me, Ronald Reagan had it right: ‘It’s probably true that hard work never killed anyone – but why take the chance?’ So I’ve taken the easy route, just sitting back and working through great managers who run their own shows. My only tasks are to cheer them on, sculpt and harden our corporate culture, and make major capital-allocation decisions. Our managers have returned this trust by working hard and effectively.”
Chenault retired in 2018 to be succeeded by another American Express lifer, Stephen Squeri. In May 2020 Buffett offered the same advice to Squeri concerning American Express when Covid-19 was raging that he had 56 years previously at the height of the Salad Oil Crisis, “The most important thing about American Express is the brand and the customers that aspire to be associated with the brand” (“’The brand is special”’ Warren Buffett called on American Express’ CEO to protect its reputation during the coronavirus pandemic” Theron Mohamed, Business Insider, May 30, 2020.)
Squeri doubled down on maintaining customer relationships when many faced financial difficulties. Amex waived late fees, lowered interest rates and cut monthly payments. It also helped customers obtain refunds.
Moats and castles
This emphasis on building the brand has always been to deepen the moat around the economic franchise castle: “A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore, a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.” (Buffett's 2007 letter)
Buffett warns us to beware of illusionary economic franchises. You will come across many “Roman Candles,” those companies where the moat loses its effectiveness and thus the economic franchise fizzles out as determined rivals succeed.
An economic franchise, by definition, has to be enduring, which is unlikely to occur in industries prone to rapid and continuous change. A lot of “creative destruction” is going on out there. While this is great for society, it precludes investment certainty. As Buffett says, “A moat that must be continuously rebuilt will eventually be no moat at all” (2007 letter).
An illusion arises where the outstanding success of the business depends on a great manager leading the enterprise. “Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been run
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Prof. Glen Arnold
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