Sometimes the Entire Strategy Needs to be Reconsidered

Board Chairman & CEO David S. Haffner

Board Chairman & CEO David S. Haffner

For four full decades—from the 1960’s through the 1990’s—Leggett & Platt achieved growth of 15% per year (on average) in earnings, dividends, and stock price, largely by pursuing a strategy that focused intently on revenue growth. Over those 40 years revenue ballooned from $7 million to $4.3 billion, earnings grew about 1000‐fold,and our stock split approximately every 5 years. But as we entered the new millennium, our strategy seemed to lose its effectiveness. For the five years ending December 2007, Leggett & Platt’s stock priced moved sideways while the S&P 500 index achieved an 80% return. The desire for topline growth had led us to make certain acquisitions for which it’s now clear we paid too much, given their failure to meet expected performance levels.

We needed to make a change in strategy.

It starts with people

If you’re going to undertake a massive shift in your company’s strategy, I recommend you start by surrounding yourself with a solid team of A‐players. These folks need to be willing to speak their mind, offer dissenting opinions, and especially be willing to challenge the CEO when required. You can’t afford to have a team of “yes men.” Your team must be populated with bright, accomplished, capable individuals—experts in their disciplines—who are discontent with the status quo.

Limit your key objectives

To effectively change direction, you want to keep the organization focused on a limited number of key objectives.The primary strategic change we made was to de‐emphasize revenue growth, and instead focus the organization on Total Shareholder Return (TSR*). More recently, our employees and investors have repeatedly read or heard a statement like this: “Our primary long‐term financial goal is to consistently rank in the top third of the S&P 500 companies for Total Shareholder Return.” It has appeared in nearly every press release, annual report, conference call, and investor presentation that we’ve crafted since 2007. After forty years of chasing revenue growth, we have to keep reminding folks that we have changed direction.

Another significant change involved assigning each business unit (BU) to one of four different portfolio roles (Grow, Core, Fix, or Divest) based upon its competitive advantages, strategic position, and financial health. Historically, Leggett had managed all its BUs fairly uniformly, with every BU expected to grow revenue significantly. We did away with that expectation. Today, “Grow” BUs identify avenues for profitable growth. “Core” BUs enhance productivity, maintain market share, and generate free cash flow while using minimal amounts of capital. BUs in the Fix category have a limited time in which to rapidly improve performance,and those in the Divest category are actively marketed for sale.

Prepare for the unexpected

With any business strategy, you ought to be prepared for the unexpected. When we announced our strategy change in November 2007, we increased our dividend by 39%, anticipating (as did most people) that the economy and stock markets would be steadily improving. But by March of 2009, given the downturn in the economy, the U.S. stock market had declined in value by over 50%! As a result, during 2008‐2010 we paid out essentially 100%of our net earnings as dividends to shareholders—not exactly what we were planning back in 2007. But we were able to extend (to 42 years) our string of annual dividend increases, and methodically increase earnings per share,as our strong balance sheet enabled us to weather the economic downturn.

The 2007 change in strategy has produced excellent results. For each of the last 5 calendar years our stock has provided a better return than the S&P 500 index. Investors who bought our stock at the end of 2007 doubled their money by the end of 2012; in comparison, during that 5‐year period the S&P 500 index provided investors with only a 2% annual return. (Full disclosure: so far in 2013 we are trailing the S&P 500, but expect that performance to improve.)

Many authors recount the fact that strategy change is extremely difficult to successfully achieve, and we wholeheartedly agree. But sometimes it’s just got to be done.

 

Dave Haffner was appointed Chief Executive Officer of the Company in 2006 and Board Chair in May 2013. He previously served the Company as President from 2002 to 2013, Chief Operating Officer from 1999 until 2006, Executive Vice President from 1995 to 2002 and in various capacities since 1983. Mr. Haffner also serves as a director of Bemis Company, Inc., a manufacturer of flexible packaging and pressure sensitive materials. He was first elected as a director of the Company in 1995.

* TSR = Total Shareholder Return = (Change in Stock Price + Dividends) / Beginning Stock Price

This article was originally published in the Joplin Regional Business Journal.

 

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