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Our Top Three Candidates for CEO of the Year

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar. We are gearing up to name our Annual CEO of the Year in January, and today I've got with me Paul Larson, an Equity Strategist and Editor of Morningstar StockInvestor, to tell us a little bit about the nominees.

Thanks for joining me, Paul.

Paul Larson: Thanks for having me here.

Stipp: So we've had a tumultuous few years in the market. We've had consumer that's been in trouble for a while. We've had some government bailouts. This is a period of time when leadership at a company is very key. We have some good nominees that have really pulled their companies through on that front. The first one is from the retail sector. This is CEO of Costco. Can you tell us a little bit about why you chose him and how he's been able to lead that Company through some difficult times?

Larson: Sure. Our first nominee is James Sinegal of Costco. He was one of the founders of the Company and really came up with the entire warehouse concept. And he's really created a very efficient retailer and something that has also done very well in terms of employee loyalty. When you look at the employee turnover at Costco, it is just a fraction of what you see at the typical retailer, five times more turnover at the typical retailer than you see at Costco despite the fact that Costco is paying its employees higher salaries and higher benefits.

But this Company is highly efficient despite that higher pay that they are giving, and they also pass that efficiency along to their customers. And I think the thing that attracted us to James Sinegal is just that he's – retailing is a very tough business, in general, but he's still managed to create this organization that creates an enormous amount of value for all stakeholders.

Stipp: So retailing has been a tough business. Can you give us a quick sense of how Costco has managed through the downturn? What does their performance looks like? How they've held up?

Larson: Sure. And they've held up better than most. They have maintained their profitability and have indeed taken share from other retailers that have either struggled or not survived the downturn.

Stipp: So, it's one of those things where the strong gets stronger throughout a difficult time.

Larson: Yes, pick your metaphor. The tallest tree in the forest with the forest fire, the highest ground in the flood, yes. This Company is still standing strong.

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Stipp: So, our second nominee comes from financial services. Tell me a little bit about who that is and why you chose him?

Larson: Sure. His name is Richard Adams, and he is from United Bankshares. And this is a Company that stands out from the rest of the financial services industry in that it's one of the banking companies that did not take any sort of government rescue financing, didn't take any TARP money.

It also did not have to dilute its shareholders in order to avoid that government rescue. And the Company was able to maintain its dividend, unlike a lot of the other rescue companies. And they actually raised their dividend through some of the downturn, which again, is just totally different than we saw with the other 99 out of 100 bank companies in the industry.

Stipp: So it sounds like they had some smart growth, that if they have grown so much, but also did so well during the downturn, managed to hold up so well. What qualities do you think are underneath that good performance?

Larson: Well, I think you hit it right on the head. They weren't drinking the Kool-Aid back in the real estate bubble years. They were indeed growing during that time, but they were doing so very prudently by having very close attention being paid to the underwriting standards that they were undertaking with their loan portfolio.

Stipp: So the third one, Paul, is also an interesting choice, and it comes from the automotive field, obviously, one that's gotten a lot of attention over the last year or so. What's the third nominee and why was he selected?

Larson: Alan Mulally of Ford, and this may be an interesting pick given that when you look at Ford, the Company, it has a no economic moat and also the Stewardship Grade from us at Morningstar is a 'D' which is unusually low. But that is mainly because of the structure at Ford, where you have a family control, dual-share classes. Because of those issues, it scores poorly on our Stewardship model, but it does not reflect on the CEO's performance and the CEO's performance has been very good.

What Mulally did when he came in at 2006 is he raised as much cash as he possibly could at Ford, and this is well in advance of the recession and the credit crisis, by taking on new lines of credit, also selling off any non-core asset he possibly could. And because Ford had a very large cash forward when the crisis did hit, the Company unlike its two main peers, the GM and Chrysler, did not have to go to the government for any sort of assistance and it survived without that assistance and has actually thrived in recent years.

One of the things Mulally did is, he really focused on the car business at Ford. Ford had been dominant in trucks for many, many years and it sort of neglected its car business, and by focusing on its car business, it has some new models that have done very, very well recently. We think that Mulally definitely deserves a kudos for stewarding forward through a very, very tough time.

Stipp: Well, Paul, it sounds like a really good group of candidates. We look forward to hearing the actual announcement. The timing on the announcement so far we know is going to be first week of January on CNBC. So, we look forward to checking back in with you and hearing who got the award this year.

Thanks for joining me, Paul.

Larson: Thanks for having me.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.