Our 2003 CEO of the Year

In the past few years, Morningstar's CEO of the Year Award has gone to the managers of such well-known firms as  Bank One  and  Southwest Airlines (LUV). You don't need to run a huge enterprise to be a great CEO, however, as proved by the winner of this year's award, Harold "Max" Messmer of staffing and consulting firm  Robert Half International (RHI).

Messmer has led Half to market-walloping performance since he purchased the firm from its eponymous founder in 1986. He has increased revenue at more than 20% per year and boosted return on invested capital from the low teens to well over 20% by the mid-1990s. As you might expect, such stellar operating performance has translated into superior share appreciation as well, with Half's stock increasing at 23% per year since Messmer took the reins (compared with 12% for the S&P 500).

Moreover, Messmer has for the most part relied on internally generated cash flow to fund the firm's expansion from $54 million in annual revenues when he took over as CEO to almost $2 billion today--a stark contrast to the rest of the staffing industry, which spent the 1990s growing through huge, and ultimately costly, acquisitions.

In addition to expanding Half's core Robert Half and Accountemps businesses, Messmer and his team have diversified the firm into several related staffing areas. More than 50% of Half's 2003 revenues came from businesses created over the past decade. This impressive track record of expansion didn't come at the expense of profitability--the firm's return on invested capital increased every year from 1993 until the recent recession took hold in 2001.

A Hard Decision Pays Off
In mid-2002, Robert Half continued its strategy of going against the grain when it took advantage of the Arthur Andersen implosion to hire a large group of professionals away from the firm, creating a new internal auditing and risk consulting practice. (Andersen's internal audit practice was completely separate from its external audit unit.) Even though Half was going through its worst earnings slump in a decade, and the acquisition would depress earnings further, Messmer realized that the long-term gain from entering the internal auditing and risk consulting businesses would offset the short-term pain.

He turned out to be right. The new business (named Protiviti) has performed ahead of the firm's expectations, coming within a hair of breaking even in the third quarter of 2003, even though it was expected to remain unprofitable until well into 2004. Moreover, Half bought Protiviti for a bargain-basement price, paying less than $60 million for partners that should earn $15 million in operating profits in a typical year.

The creation of Protiviti exemplifies Messmer's willingness to make difficult decisions and think independently. Making a sizable acquisition when your business is hurting is hard enough--and buying assets from a firm with as much "headline risk" as Andersen is even harder. But Messmer saw that the recent wave of corporate scandals would increase demand for risk-consulting and internal-auditing services, and he's put Half in a great position to capitalize on this by creating a leading independent internal auditor that's not part of one of the Big Four accounting firms. Although Protiviti currently accounts for only about 10% of Half's revenues, it's growing significantly faster than the rest of the firm.

Doing Right by Shareholders
Finally, we think Half scores well in corporate governance. A solid majority of the board is independent, and most directors own at least 1% of the firm's shares, giving us confidence that they'll act in their fellow shareholders' best interests.

Half's accounting is conservative, its financial reporting is transparent, and the firm has avoided the big-bath charges used by so many other firms to duck responsibility for decisions that could hurt reported earnings. For example, Half essentially expensed its acquisition of Protiviti by taking the cost out of its SG&A (selling, general, and administrative expenses) line, rather than lumping the expense into a one-time charge that could have been explained away.

Executive compensation, however, is quite high--the highest in the staffing industry, in fact--though it is closely linked to the firm's performance. As earnings rise and fall, so do the bonuses and restricted-stock and option grants made to senior executives. For example, Messmer's 2002 cash bonus was only a quarter of the size of his 2001 bonus, reflecting the firm's relatively poor performance during the 2002 employment slump. All senior executives forfeited about half of their 2001 restricted stock awards for the same reason.

We also think Half's stock-option plans are a bit too generous, running at an average of just over 2% of shares outstanding during the past several years. The firm does not currently expense options on its income statement, but we give Messmer credit for being forthright and specific in the firm's letter to shareholders and directing investors to the appropriate section of the annual report where option-expense information can be found.

These are, however, our only issues with a firm that has served shareholders very well. Through smart capital allocation and independent decisions, Messmer and his team have steadily built Robert Half into a very profitable and shareholder-friendly firm. We think the recent success of the Protiviti unit underscores this long-term track record, and we're happy to name Max Messmer our 2003 CEO of the Year.