In this podcast, Motley Fool producer Ricky Mulvey talks with Motley Fool senior analyst Jim Gillies about:
- Whether CEO succession plans are worth investor attention
- Succession storylines that rhyme with real ones
- Questions about Berkshire Hathaway's next stage
- One bold prediction about the end of Succession
SPOILER ALERT: This episode discusses plot points for Succession through season 4, episode 5.
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This video was recorded on April 29, 2023.
Jim Gillies: I'm wary when a CEO makes himself part of the show and Steve Jobs was, for rightly or wrongly, very much part of the show. Tim Cook likes to stay in the background, and another example I'm going to give you here is what I call the dueling Bobs, Disney, Bob Iger, Bob Chapek. Bob Iger absolutely makes himself part of the show.
Chris Hill: I'm Chris Hill and that's Motley Fool senior analyst Jim Gillies. We're putting an investor's lens on the TV show Succession, the award-winning HBO series about Waystar Royco, a fictional media conglomerate and the drama that surrounds the family running the business. Ricky Mulvey caught up with Gillies to talk about the real-life companies that parallel Waystar Royco, and the challenges of investing in larger-than-life CEOs and before you start listening, let me warn you right now, this episode does include spoilers for Succession. If you watch the show and you haven't caught up through Episode 5 of Season 4, consider yourself warned. With my spoiler alert out of the way, let's get started.
Ricky Mulvey: While I'm giving people time to tune out if they haven't seen season 4, Episode 5, I want to vamp a little bit outside of the show.
Jim Gillies: [laughs]
Ricky Mulvey: I think CEO succession for a lot of businesses is often followed, but I don't know if it's actually important to track. It's really difficult to judge and also asking people who are CEOs what's going to happen after you pass on is a bit like asking someone the details of their will.
Jim Gillies: Yeah, the ability to really step in it rather quickly is very much there and I don't having asked a few people what's in their wills. I think succession, I think it's important and I hope you hear the uncertainty in my voice there. Because I think we somehow, and occasionally, we need to remember the CEOs are people and people are complicated and people are nuanced and people have their own interests and sometimes those interests are aligned with yours as an investor. Yes, that's true even with the best CEOs. I'm looking at you, Warren Buffett. We have to remember that things are complex and sometimes one of my all-time favorite CEO succession stories is where were you the day Steve Jobs died? I remember it well, I was in New York at my friend's place and she said, "Oh, golf word expletive deleted." She says, "Oh blank. Steve Jobs just died." And I go look and of course, it was after hours when they announced it and Apple's stock price did not react well, I'll put it that way. Except what really changed? You already had Steve Jobs' handpicked successor was already running the company like before that, that would be, of course, Tim Cook. I will argue Tim Cook has been a much better CEO than Steve Jobs ever could have been post-iPhone. He died in 2011, of course, but the iPhone was 2007. He has been a better CEO than Jobs would have been in a post-iPhone era for investor returns. Which of course, as an investor I care about. But on the day that Steve Jobs died, people very clearly thought, oh no, this is terrible. This is a disaster. The world has unfolded very differently from there. That's why I say I'm not sure. I think it matters, but I'm not sure.
Ricky Mulvey: Wait. One second, I want on zero in on before we keep moving. You said, looking at you, Warren Buffett. He's been like pretty good for stock investors, right?
Jim Gillies: He has and I love Uncle Warren and I'm going to the Berkshire meeting in a couple of weeks or by the time this airs, I guess the next weekend. But one of the succession things that Uncle Warren has put in place is that the chairman of the board, once Warren and Charlie exit stage left, they've already picked a successor to run the business and also to invest. But the chairman of the board is supposed to be Howard Buffet, who is, ''To preserve his oldest son to preserve the culture at Berkshire." The company he doesn't work for and has shown no aptitude or any kind of managerial, those types of skill sets. I'm like OK, why? Why do we need -- and not to call Howard Buffett a nepo baby, but he's kind of a nepo baby. Like he'll be installed in the, fine, figurehead job. But still like you think Warren Buffett, who famously has a long-term relationship with Bill Gates, of course, founder, former CEO of Microsoft, as well as understanding during the Ballmer years at Microsoft, not a hell of a lot happened, but then they got a true rockstar, my opinion, Satya Nadella who has taken Microsoft to even greater heights. I don't know, I've never bought into Howard Buffett is going to preserve the culture.
Ricky Mulvey: That's so funny, you're afraid to call him nepo baby. He's going to be the chairman of the board because of who his dad is.
Jim Gillies: I'm absolutely calling him a nepo baby.
Ricky Mulvey: OK.
Jim Gillies: Well, I'm being a little disingenuous.
Ricky Mulvey: Fair enough, yeah.
Jim Gillies: I'm afraid to call him that, but I'm absolutely calling him that.
Ricky Mulvey: Yeah. Can of coke and common sense guy's putting his kid [laughs] who doesn't run the company at the helm. In the case of Succession, it's not really clear if the kids actually want to run the company, you've had your time. We're getting into spoilers now.
Jim Gillies: [laughs] OK, here we go.
Ricky Mulvey: Starting generally watching this season, watching this show, have there been times where you watch it and you go, huh, this rhymes with something I've seen in real life.
Jim Gillies: I generally think that second-generation CEO, second-generation taking over, I'm generally not a fan, sorry Howard Buffet. I'm generally not a fan because it's a difficult job, it's a complex job. Why do you think that just because you share some DNA with the the previous holder of the position that you will be as good and Roy Disney comes to mind as well. One of my favorite activist investing stories on that one, too. When I look at what's gone on with Succession in the show, first off, I can't think of a better pairing of writer and actor to deliver the lines than Kieran Culkin and Roman Roy, I just give that guy all the awards because he's hilarious. But what strikes me and has always struck me with this show, of course, there's four children. There's Kendall and Roman, and Siobhan and Connor from the first marriage who's over there being delusional. But he wants a certain succession, too if you know the plot lines. These kids are profoundly damaged by their father and the presence and the scale of their father, of who he is, and what he has built. I would think if this were a real corporation and a real storyline, I would be very reticent to have any of them taking over. I think probably Siobhan is probably the most qualified. But there's a lot of entitlement in Roman and Kendall, they feel they deserve it. They of course, are currently co-CEOs in the show, if you've watched to "Kill List," the most recent episode. But there's constant angling for position. There's constant working against each other. There's constant palace intrigue, we'll call it Kendall in particularly is a profoundly damaged human being, in my opinion, who is just looking for daddy's love. Again, I think probably the one who is the most confident and I think the one that Logan, the patriarch of the family, I think the one he probably was closest to and thought could probably do the job best was Siobhan. I look at these characters and I'm like, I actually think the best thing for investors in the show would be that the storyline right now, Fools, for those who don't know is that they're in the wake of the patriarch's exit from the stage, they are debating whether to keep the company or sell the company to a Swedish interest and I'm sitting there going, "Oh no, you sell and you take your money and you go sit on a beach, and roll around in your dollars."
Ricky Mulvey: A Swedish vampire.
Jim Gillies: That Swedish vampire.
Ricky Mulvey: But I think that makes it more realistic. I think what you said that the fact that they're profoundly broken, they're not qualified for the job.
Jim Gillies: They are not.
Ricky Mulvey: In some ways, doesn't that offer more similar [laughs] to like CEO succession in some cases where the person who gets the job, it's not necessarily because of their skill.
Jim Gillies: No.
Ricky Mulvey: In the case of Succession it's because Kendall Roy's name was half crossed out, half underlined, and he was able to capitalize it the right moment. Even if it's not successful, that's played out before.
Jim Gillies: Yeah. I've got a couple, I was trying to think of before we did this. I was just trying to think of a couple of examples of family succession I've seen and these companies are both gone now, so don't bother looking it up. The two that came to mind, do you remember Dressbarn? I think the stores might still be around.
Ricky Mulvey: I'm shaking my head now.
Jim Gillies: Yeah. I always thought Dressbarn was funny because, "Hey honey I want to buy you something nice, let's go to Dressbarn." But they were the parent company of several concepts with Dressbarn and Maurices, Justice, which was for younger girls, a couple more. Anyway, they were fine family-run business. The family's still owned. It was a husband and wife who founded the company. The husband had passed on. The wife was still on the board, I believe the son was the CEO. There's your family succession and I think the daughter was on the board as well, and I think the family had about 25% of the stock still. Look, it was a niche retailer. It's making the family a few million bucks a year, like what their take-home was. That's a nice little life.
Ricky Mulvey: Yeah.
Jim Gillies: But again, it's the hubris of wanting to get bigger, which might be coming into the TV show Succession and the most recent episode especially. But the hubris of wanting to get bigger. Dressbarn. Again, they owned Maurice's, I think they acquired Justice and then they went out and acquired Ann Taylor. I'm pretty sure it's Ann Taylor and Lane Bryant. Forgive me, Fools, if I've misread the names. But then they levered up to go by these other brands because we're going to have a whole suite of brands, and then they had a really big, we're going to do new distribution centers and we're going to spread out across the country, and they basically leveraged themselves into bankruptcy. They destroyed generational wealth. The family stock holdings were nine figures' worth. As I said, the family was still pulling a couple of million bucks a year collectively in addition to having those shares. Rather than sell their shares and bank your hundred-plus million dollars and just going and sitting on a beach, which I promise you I would do, they destroyed it. It went into bankruptcy. That's what I thought was bad.
Then another one since we're in a slow-moving banking crisis right now, Ricky I figured I'd give you some banking fun. There was a bank called Irwin Financial. It was in the Midwest going into the credit crisis and they had bet a big deal. They had paid a dividend and a growing dividend for a couple of decades, I think heading into 2007, 2008. The CEO was the fourth generation of the Irwin family. Like fourth generation, he always seemed a lot more interested in doing good works and appearing on charitable boards and being all over the place. I don't think he was really connected with the business, but because he was the fourth generation, there was again family wealth, and he was controlling a trust that owned whatever percentage of the bank. But he was sitting on like 10 or 15 charitable boards and doing good works and things that by themselves are good but while he was doing that, he was ignoring the fact that the lending standards at his bank had completely gone off the rails. Then the mortgage crisis of 2007 through 2009 shows up, long story short, wiped out his business and again, destroyed generational wealth, fourth-generational wealth here. If I am trying to pick the successor of Waystar RoyCo, if I'm on that board, I'm sitting here going well, anyone but Roy. We're not going to go with this nepo baby succession plan.
Ricky Mulvey: Yeah, it's the confusion of bloodline for business savvy. I think you bring up a good point, and maybe we'll be wrong about this but I could very well see that being the end of the show, which is the destruction of generational wealth. Right now they're in a position. GoJo's offered them some, I don't know the value of the deal and I think that's deliberate, but an insane amount of money to take over the entire company and they're allowed to just walk away. But now you have Roman Kendall is co-CEO. While they're on the plane, they're patting themselves on the back for doing a great job as CEO. Hey, I think someone reminds them that they've only been at the job for 24 hours.
Jim Gillies: Yes.
Ricky Mulvey: They are also terrible at it. You see them when they walk in with Lukas Matsson in the latest episode, the Swedish tech billionaire, they're getting dogged. They realize that they're not punching of their weight class and that they're going to get steamrolled by this guy.
Jim Gillies: Yeah. Again spoilers Fools, the last scene where Roman just goes off on him, on Matsson at the top of the mountain. It ultimately results in a better deal offered to them. But the words coming out of his mouth, he's not negotiating. He is letting his bile and his anger, and his disgust the whole process just wash over Matsson. Then it ultimately ends up in a better offer for his company. As you say, they're being all self-congratulatory in the plane over to Norway and they're looking very happy with themselves, and the way back they just look like beaten dogs.
Ricky Mulvey: Yeah, he wants a photo.
Jim Gillies: Matsson knows it, and he has Shiv send him a picture. Yeah it's fantastic.
Ricky Mulvey: I think something remarkable about that scene, too, is it's the first time that at least as a viewer, I've been confident that Roman was telling the truth. Is it a point where he is so broken that the sarcasm breaks down, the humor breaks down, his language breaks down to the point where he has no other option but to tell the truth. Matsson in that moment says, you've lost. In telling the truth and saying how you actually feel, you've lost the game basically, and now I could beat you. Thinking of Matsson, I want to turn the attention to him and pick your brain to see if we can find some parallels there. This episode he becomes a character, so Lukas Matsson, the Swedish tech billionaire forces the Roy family to come to him in Norway for retreats days after the death of their father to negotiate a business deal. That could have been a phone call, which is that he wanted them to know that they wanted the Cable News Network or the news network ATN back into the deal. This is the episode that reveals that Lukas Matsson's a vampire. [laughs] Physically, he's sending half liters of his blood to the comms director who's his ex-girlfriend. The actor Alexander Skarsgard was also in True Blood, so there's a little bit of an allusion there. The coldness of his character and also his admission that he wants to take ATN, take Waystar RoyCo and buy it and strip it for parts, I think those are two of the biggest symbols that it's a vampire storyline. I think that is also very common in business acquisitions in the publicly traded investment world.
Jim Gillies: It is. I'm actually going to go back to the Buffett line as well here, where one of the aspects of the culture of Berkshire, something maybe that Howard Buffett is going to be tasked with once Warren has gone, is Buffett famously talks about if you sell to us, we're not in the business of stripping for parts of ripping out what we can and maybe selling it in five years. If you sell to us, it is forever. Specifically, if you sell to us, you will get to continue managing your own business where we can't provide new management, so we're largely going to be hands-off. The idea that acquisitions are made and the whole concept of a "kill list" to the title of the episode, is when you have two companies, one company acquires another company and they are meshing two organizations, it's the acquirer builds a so-called kill list, a list of the people they do not/will not need at the combined company. That is the great problem for a lot of acquisitions. If you're acquired and you've got a whole ton of stock and you're getting a nice buyout, this could be great, but you're probably going to lose control of your baby and/or your job. If you're fine with that, OK, but a lot of the rank and file won't, if you're the corporate treasurer and you're far down the org ladder and you probably don't -- your salary, you need the salary to make your mortgage and eat, time to bone up on that resume because you're probably not going to have a job tomorrow or if one company acquires another company and they've each got a sales force, well, you know who's going away. It's not the sales force of the existing business.
Ricky Mulvey: No company needs two CFOs.
Jim Gillies: No company needs two CFOs.
Ricky Mulvey: I think the one story that might be closest to this show is the story of Louis Vuitton, Bernard Arnault. For those who don't know this guy, he is the richest person in the world, surpassed your guy Musk. Who is the other person in the running? I can't think of it. It was Musk, Bill Gates, but now it's Bernard Arnault is the richest person in the world running Louis Vuitton and he has five children who have essentially been jockeying for the CEO job all of their lives. He's made the promise, oh, this is going to be a meritocratic decision. It's going to go to one of them, highly educated, train them to be elite business people. What he did, I think earlier this year was he just raised the retirement age of his company from 74 to 80 years old.
Jim Gillies: How old is he?
Ricky Mulvey: Just so he can play a few more seasons. He's 74.
Jim Gillies: Exactly, wonder why he did it.
Ricky Mulvey: That's the case with a lot of succession stories and this was the case in Succession where we're going to have this promise that the leader is going to step down as CEO. But we'll see when it actually happens. That's been going on at JPMorgan, too.
Jim Gillies: I am going to go back to the show for a minute and let me go back to the first season because, of course, the show starts with Kendall as the heir apparent. It starts with, we're about to coordinate Kendall Roy as the natural successor to Logan Roy, played by the brilliant Brian Cox. Basically, Kendall, who again is a bag of anxieties frankly, he's completely unsuitable for it and he screws up and Dad takes the opportunity to say, I'm going to stick around again, much like Bernard Arnault here. But if you go back and watch the old seasons again, so the two boys, or the two younger boys because again, the fourth child from the first marriage, Connor is over in the corner doing whatever Connor is doing, the boys are enmeshed in the company. Again, they're currying for favor and trying to please Daddy, but also they hate Daddy and Siobhan is out. Siobhan is a PR consultant. She's out and if you go back and watch those early episodes, the way that Brian Cox talks to her, and you can see the affection that he holds her and now he's still fairly coarse language, he's still Logan Roy so he tends to run over everything in his path. But the way he talks to her versus the way he talks to the kids or to the boys, you can see he actually respects her more than his sons because she's left, because she's gone out on her own, because she's gone and built a career independent of him. Did she surely have the ability to get places that you or I couldn't get because she had family connections, of course. But she's very clearly the apple of his eye, and the way he interacts with her and what changes is when she comes and works for him, then she slots in with the brothers and becomes just everyone. It's the worst thing that she does personally is to actually come and work for her father because she loses that autonomy and she loses her father's respect, and it's tragic.
Ricky Mulvey: Do you think there are any takeaways for investors from the show Succession?
Jim Gillies: I'll give you a couple. One is really quick. I am wary of the succession plan is based on DNA. I like a true meritocracy. I want the best person for the job, and I don't particularly care where they came from, so that's No. 1 and that's very broad. The narrow one, I do have one more example of something that I'm going to want to avoid because most of the time you don't really see when a CEO transition is coming and when it comes quite often, it's very easy for me to say, oh, succession, Tim Cook versus Steve Jobs. Tim Cook is a much better CEO than Steve Jobs could have been for Apple. But it's 12 years of experience I can draw on to make that assertion. In the moment, you don't know about it and part and parcel of that assertion is, I'm wary when a CEO makes himself part of the show and Steve Jobs was very much for rightly or wrongly, very much part of the show. Tim Cook likes to stay in the background. Another example I'm going to give you here is what I call the dueling Bobs, the Disney, Bob Iger, Bob Chapek. Bob Iger absolutely makes himself part of the show. He has so much power and he did the whole, oh, ah shucks.
He was doing that for years before he actually left in 2020, then his handpicked successor, Bob Chapek comes in and he's almost immediately and constantly undermined by board member, former CEO Bob Iger, and he's blamed for stuff. I will note that Disney hit its all-time share price high under Bob Chapek. Just going to put that out there. But Iger is constantly undermining him, even though the world is upside-down, their parks are closed due to COVID, everything is just off-kilter completely, he's inherited the debt associated with the Fox acquisition which was made under Bob Iger. I'm of the opinion most streaming services are going to basically provide value to subscribers and no value to companies, sorry, Netflix, sorry Prime, and Disney Plus by all accounts is losing money. Because he inherits that and so he's just beset on all sides and he even got the wonderful stamp of approval from the board, which I mean, at that point I hope you studied his resume, polishing it up. But he gets a stamp of approval from the board, I think about seven or eight months before Bob Iger knifes him in the back once the pandemic is largely over and he can reassess. Then Bob Iger almost immediately starts, oh, shucks I'm not going to be here that long. If I'm the CEO candidate for the next time Bob Iger is wanting to leave and I am not. But if I was one of the potential candidates, I would have my employment contract drawn up where I get a billion dollars if Bob Iger sets foot on Disneyland Park ever. You can't trust the scenario. You might as well just give it to Iger until he dies because no one's going to trust him and so you've now got this fiat state run by Bob Iger and I think that detracts -- and look, Disney's share price returns have been mediocre for years frankly, which is bizarre for a company that owns childhood.
Ricky Mulvey: [laughs]
Jim Gillies: Tell me I'm wrong.
Ricky Mulvey: I think one reason you're not going to be the CEO is the promise that the streaming service will never ever make money. But no, I see what you're saying. I think something that Iger and Jack Welch actually have in common is that there might have been a deliberate, and I'm saying may possibly who knows, a deliberate almost sandbagging of the replacement where you don't want the next person because no one can do the job quite like you can.
Jim Gillies: Exactly.
Ricky Mulvey: Whether it's Jeff Immelt, Bob Chapek, they come in as the handpicked successor from the CEO and there may be a subliminal knowledge from that person that it's not going to run as well as it could under me because that's impossible.
Jim Gillies: I will also note that, of course, Jack Welch managed to not just blow up GE with Jeff Immelt in the background, but he did a deal on Home Depot, too. Because Bob Nardelli who lost out on the GE job goes to Home Depot and just was brutal there for years and only after he was ousted, which I think was early '07. No tears for Bob Nardelli. You got a quarter-billion dollars to go away but only after he was ousted did Home Depot just turn into this fantastic cash-generating engine that has become, and I think the stock is going to make up a number. I think it's about 320 bucks today, ballpark. I have very fond memories of Home Depot. You could have bought Home Depot. Have you heard of them? They are in one or two cities around North America. You could have bought Home Depot for $19 in the wake of Bob Nardelli's exit, which to me is just fascinating, so much value is created. But again, Bob Nardelli, candidate for GE, lose out GE, goes over and tries to apply the GE method at Home Depot and fails miserably. I think that's another lesson. Just because you might have come from a system that has a much vaunted CEO, I'm not sure that you go to a different culture or a different company it's going to translate. It might in fact just explode.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.
