CEO of the Year Nominees

At the end of each year, we look for chief executives who have increased shareholder value over the long haul and who haven't been afraid to lead their companies by thinking independently. The ones who've shown the greatest success in these areas become candidates for the Morningstar CEO of the Year award. This year's nominees aren't particularly well known, but all four finalists have done right by shareholders in their own way. 

James Tobin
 Boston Scientific (BSX)
James Tobin joined medical-device firm Boston Scientific in 1999, after an unnerving year that included a major product recall, the discovery of accounting discrepancies in its international business, and a Justice Department investigation. Upon taking the reins, Tobin made the critical decision to stop outsourcing the firm's research and development efforts and to bring R&D in-house. As you might imagine, the immense investment this required put a big crimp in Boston Scientific's 2000 and 2001 results.

Despite a very nasty slide in Boston Scientific's stock, Tobin stuck to his plan, and Boston Scientific launched its first internally developed stent (a small device used to prop open clogged arteries) 14 months after he joined. A successful second-generation stent followed, and earlier this year Boston Scientific launched an even more advanced version in Europe--a product which has already taken two thirds of the market. This latest stent, which is coated with a drug that mitigates potential complications, will likely be available in the U.S. early next year, and we think it will take market share here as well.

As for hard numbers, Boston Scientific's gross margins, operating margins, and returns on capital have all improved substantially since Tobin took over, and the shares have done nicely as well. Although the firm has a tough competitor in  Johnson & Johnson (JNJ)--the maker of the only other drug-coated stent currently on the market--we think the firm will be able to hold its own.

Max Messmer
 Robert Half International (RHI)
Max Messmer has managed this temporary-staffing firm since 1986 and has consistently done a great job of allocating capital. Returns on invested capital at Half improved to 25% in 2000 from a level of 10%-12% in the late 1980s. Messmer avoided the massive acquisitions that hurt other staffing firms in the 1990s, but didn’t shy away from investing heavily in new businesses that could drive internal growth. For example, more than half the firm's current revenue comes from business lines that were introduced during the past 10 years.

We think the Protiviti unit--an internal-auditing group made up of former Arthur Andersen partners that Half created in mid-2002--is a great indication that this level of internally generated growth will continue. This unit was expected to be a drag on profitability well into 2004, but it broke even in the third quarter of 2003 after hurting the firm's earnings for 2002 and most of 2003. While it's nice to see profitability ahead of schedule, it's even better to see the firm making a decision that will help its long-term results despite its negative effects on the short term.

Messmer has delivered the goods for shareholders, as well, with Half's stock returning 22% annually since 1990--double the market's 11% return over the same period. One knock against Half is that Messmer and the rest of the management team are very well compensated, and use options liberally (though not egregiously). Since compensation has historically been tied pretty tightly to the firm's operating performance, though, this is not a huge deal.

Richard Kinder
 Kinder Morgan (KMI) and  Kinder Morgan Energy Partners 
Richard Kinder made the finalist group last year, and he's back for another try. Kinder Morgan is one of the country's largest owners and operators of energy pipelines. It's not the world's sexiest business, but it isn't much affected by swings in commodity prices, and it has some pretty huge customer switching costs. (Once a well, refinery, or power plant is literally hooked up to a pipeline, the physical capital required to switch providers is often prohibitively high.)

Unlike many energy firms that "drank the Kool-Aid" by betting heavily on energy trading, Kinder has stayed resolutely focused on generating income by investing in hard assets--often those that were sold off over the past few years by firms that jumped on the energy-trading bandwagon. This stick-to-your-knitting strategy has worked well for shareholders since Kinder formed the firm in 1997--Kinder Morgan Energy Partners' shares are about triple what they were at the start of 1998, and partnership distributions have more than doubled. Since Kinder Morgan Energy Partners is a master limited partnership, it has to pay out 90% of its cash flow, and that’s actually how Kinder himself gets paid.

As the largest individual shareholder, Kinder makes more money only by increasing partnership distributions. (He receives only $1 in cash compensation from Kinder Morgan.) However, as a general partner, he is entitled to a sizable share of each incremental dollar of cash flow that the firm generates, which you can view either as a reasonable performance incentive or as dipping too much from the well. In any case, Kinder has certainly made shareholders wealthier so far.

Brian Roberts
 Comcast (CMCSA)
Although more than a few observers--us included--were skeptical that Comcast could earn a decent return on the premium price it paid last year for AT&T's cable networks, that's exactly what Brian Roberts has done so far. On almost every performance metric imaginable, AT&T Broadband (ATB) looks like a completely different company today than when Comcast bought it.

EBITDA margins have zoomed from 22% to 33% over the past year, for example, and operating cash flow per subscriber has increased from $205 to $274. But Roberts has done more than just cut costs at ATB--he's also managed to turn massive subscriber losses (434,000 during the first three quarters of 2002) into modest subscriber gains (101,000 so far this year). Given how dissatisfied ATB customers were, and how fierce the competition from satellite has been, this is quite an accomplishment.

Roberts' long-term track record is also a solid one, with annual shareholder returns clocking in at 20% per year since 1990--far ahead of the market's 6% annual return over the same period. One caveat is that because of Comcast's share structure, the Roberts family effectively has total control over the firm. Given the returns they've delivered for shareholders since the firm went public in the early 1980s, this certainly hasn’t been a problem so far--but the fact remains that minority shareholders are just along for the ride.