The Naked Fund Manager: Why corporate chiefs are better leaders than politicians

After yet another car-crash interview from leading Labour MP Diane Abbott, I thought I would talk a little about the importance of leadership in an organisation. There is a vast gulf between what Ms Abbott’s recent performance implied about the quality of some political leadership, and the level of professionalism exhibited by (most) corporate leaders. It is one of the first tests a company has to pass before I consider it to be “investable”.

I agree with General Bernard Montgomery in his definition of leadership. He said leadership is:

“The capacity and the will to rally men and women to a common purpose and the character which inspires confidence.”

The best leaders can inspire their teams to do great things, but the worst inspire nothing but uncertainty, hesitancy and derision.

Some political leadership leaves a lot to be desired

My immediate reaction to Diane Abbott last week was hilarity like everyone else. However, the more I thought about its implications, the more that schadenfreude turned to frustration.

I would suggest that we're all used to a fairly high level of professional conduct in our work places. Corporate Britain is a pretty well run machine most of the time. Which is why it is so galling to see the incapability and laziness that permeates some of the political class.

The lack of preparation when announcing a core policy on national radio displayed an impressive level of arrogance. This was, after all, a couple of very simple questions from Nick Ferrari on the very subject Ms Abbott was there to announce, a subject that falls within her specific brief! It was hardly a blindside.

If any of us carried out that paucity of preparation before an important meeting, we would not be holding onto our jobs for very long. And yet, and this is what frustrated me, it has almost become expected and unsurprising that senior politicians can behave that way. These people are vying to become part of the executive for the whole nation, but often seem incapable of spending just 5 minutes making sure they understand the policies they are putting forward, and how they are costed.

I’m not trying to tar the whole political class with the same brush. There are many politicians that are hard working, intelligent and very good at their jobs, just as there are many poorly run businesses. However, I would venture the level of leadership and competence in the majority of corporate Boards is substantially higher than that exhibited by some senior politicians on a regular basis.

Juxtaposed against the leadership exhibited by Diane Abbott, I have highlighted two corporate leaders below. Lord Wolfson’s stewardship of the mighty NEXT, and David Page’s track record at Pizza Express and now at Fulham Shore.

NEXT’s Lord Wolfson

Here is an example of how to lead with integrity. When a “share-matching” remuneration scheme, set up by Next’s Board in 2010, started to generate what he considered outsized returns for himself, CEO Simon Wolfson decided to forego the bonus and instead distribute it to his staff. He did this in both 2013 and 2014, but hasn’t done since because his bonuses have dried up as Next has hit the brakes over the last 18 months.

Lord Wolfson transformed NEXT into an omni-channel retailer, grasping the opportunity the internet presented far faster than his peers. Under his stewardship, over the last 16 years, NEXT revenues have grown from £1.6bn to over £4bn. Profit after tax has grown from £160m to £660m, and hence he has not just delivered stellar revenue growth but also strong net margin expansion from 10% to 16%. That is leadership.

Fulham Shore’s David Page

Onto another example of leadership and experience in a much smaller company. I see that finnCap initiated on Fulham Shore last week. Detailed broker coverage on this company is overdue and very welcome.

This is an example of a young company in the early stages of what will be a period of rapid growth. The restaurant format is attractive and the addressable market is sizeable. However, the primary reason why it is exciting is its leadership and their previous track record.

David Page has quite a CV, as summarized well by finnCap analyst Roger Tejwani:

“ Executive Chairman David Page was owner and Managing Director of the largest franchisee organisation of PizzaExpress for twenty years before he became CEO of PizzaExpress when it floated on the LSE with a market cap of £40m in 1993. Ten years later, the company was acquired by a private equity consortium for £278m. David also founded The Clapham House Group Plc – owner of Gourmet Burger Kitchen – which was sold to Nando’s for £30.4m in 2010, and his other restaurant interests include Rocca di Papa, Bukowski, MEATliquor, Wishbone Brixton and Chillbox.”

I have written on FUL in prior articles, such as Roll-outs: the Good, the Bad and the Ugly. At the time I was deliberately vague on unit economics for the Franco Manca concept as there was little in the way of guidance from the company, broker research, or track record to work with.

finnCap provide a lot of useful detail in its initiation note but one brief quote if I may:

“The simplified menu, low rent and capex aside, rapid cover churn at Franco Manca (we estimate 5x turns per day with the blast cooking process shortening average diner dwell time to 40 minutes and absence of online booking removing no shows) supports rapid payback on investment. Typical EBITDA per Franco Manca restaurant in London is £250-300k per annum, with payback on new restaurants between two and a half and three years and pre-tax cash ROI estimated at 35%, well in excess of their cost of capital. We expect rollout to be self-funding from 2020.”

The unit economics quoted by finnCap and clearly guided by Management, are better than I had estimated back in February. My rough estimates were EBITDA/unit of £200k/yr and fit-out costs of £800k. finnCap figures are EBITDA/unit of £250-300k/yr and fit-out costs of £650k. The impact of this is a stronger ROI and a much more attractive payback period of c.2.5 years per restaurant.

Conclusion

The examples of NEXT and Fulham Shore cover companies at opposite ends of the spectrum. NEXT is a giant in retail that is firmly sat within the FTSE 100. Fulham Shore has a market cap of c.£100m, is only a few years old, and just starting out on its growth journey.

However, both can only succeed if their leadership can inspire the many employees that make the businesses what they are. Capacity, will and character are the three traits General Montgomery highlights in his definition on leadership. I wish these were exhibited by more political leaders.

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To read a brief outline of how I think about stocks, and what I aim to achieve in this blog, please check out my first blog where I set out my stall.

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Please Note: To be clear, I do not and will not ever give any advice. I will rarely mention individual stocks but when I do these will not be recommendations, instead just my thoughts at that point in time.