09 Nov 2016

The owner-operator advantage

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The Owner-Operator AdvantageThe owner-operator advantage

It was a typical Monday morning for Jeffrey Lorberbaum.He went to the office, ready to start the week, but by the time he got to his desk he noticed something was different. Nobody else was there. Confused, he called his wife. Smiling to herself, she politely informed her husband that it was a holiday, Memorial Day, and most people wouldn’t be working.

Most bosses of Fortune 500 companies aren’t working on Memorial Day either. In fact, it wouldn’t surprise us to find many of them in a location far from the office that weekend. And, of course, that’s perfectly fine. Mr. Lorberbaum has nothing against Memorial Day – we’re sure he supports the honoring of our veterans. It was a mere oversight, and in our view a telling one. He wasn’t on a yacht, drink in hand. He was, as usual, in his office, thinking about carpet.

Jeffrey Lorberbaum is the Chairman & CEO of Mohawk Industries. As the son of immigrants who started a successful carpet manufacturer, Aladdin Mills, his mind has been on carpet pretty much from the beginning. He was running the family business when it merged with Mohawk Industries in 1994, and has led the flooring manufacturer ever since. Today, he owns more than 13% of Mohawk2, which makes up the vast majority of his net worth. He has some very good reasons to be thinking about carpet.

We like Jeffrey Lorberbaum. His story is unique, but it’s also familiar. Similar anecdotes could be shared about more than a few CEOs in our portfolios. That’s not an accident – it’s by design. We believe incentives matter, so when it comes to choosing a manager, we’d prefer another owner – someone with capital at stake, someone with incentives that are aligned with ours. We call them owner-operators.

Owner-operators are different than the average CEO in corporate America. They have different motivations, feel different pressures. This affects their behavior and decision-making in positive, value-adding ways. Even better, the data suggest this value creation is rarely reflected fully in prices – creating an opportunity for consistent excess returns over time. This paper will describe our observations from more than 15 years of managing a strategy that prefers owner-operators. We’ll supplement these observations with quotes from owner-operators in our portfolios, as well as findings from an academic study by Ulf von Lilienfeld-Toal and Stefan Ruenzi on high ownership CEOs published in the Journal of Finance.

 

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Disclosure

1 Jennings, Jason. 2009. Hit the Ground Running: A Manual for New Leaders. New York, New York: Portfolio. Print.
2 Mohawk Industries Inc. United State Securities and Exchange Commission Form 4 (Statement of Changes in Beneficial Ownership). Filed June 10, 2015. Retrieved from http://www.sec.gov/Archives/edgar/data/851968/000085196815000059/xslF345X01/edgardoc.xml

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