Nominees for CEO of the Year

Once again, it's time to announce the list of our finalists for CEO of the Year. As Morningstar's universe of covered stocks has expanded over the past couple of years, I've spent a lot of time listening to horror stories of poor corporate governance and simple-minded capital allocation. So, it's truly a pleasure to focus on a small group of managers who respect their shareholders, run their companies well, and aren't afraid to pursue the road less traveled.

As a reminder, here's what we look for in selecting our CEO of the Year. First, we're looking for a manager who has added value--not just someone who was in the right place at the right time, but whose strategic decisions and capital allocation increased the intrinsic value of his or her company. Second, we want to see strong corporate stewardship. This means corporate policies that respect shareholders and a compensation structure that rewards long-term value-creation and is tied to corporate performance. We don't like to see managers paid for breathing. Third, we like to see managers who think (and act) independently. With so many pressures to think short-term and follow whatever strategy the consultants are pushing this year, it's tough to go against the grain--but that's what we're looking for. Finally, of course, we want to see stellar long-run financial performance that has created real value for shareholders.

So, without further ado, here are this year's finalists, in alphabetical order.

William Cooper
 TCF Financial 
Cooper took over this near-dead bank about 20 years ago and transformed it into one of the best performers in the industry by focusing on blue-collar customers--a segment ignored by most banks, who were too busy chasing high-net-worth customers. He pioneered a strategy of locating branches in supermarkets and offering products like free checking and zero-minimum-balance accounts. Moreover, he stuck to his branch-centered strategy in the mid-1990s, when online banking was all the rage and many banks were charging extra fees for talking to a teller.

These moves have paid off in spades for shareholders, with the shares appreciating an average of 24% per year since Cooper took over, and the company posting returns on equity north of 20% on a regular basis. Stewardship is also excellent. We award TCF an A, based on great disclosure and a sound compensation strategy that ties restricted stock vesting to specific earnings goals.

Hunter Harrison
 Canadian National (CNI)
Harrison has been running CNI with a novel strategy--make the trains run on time. Surprising though it may seem, the notion of guaranteed delivery times was unheard of among large rail companies when he joined CNI as COO in 1998 (Harrison became CEO in 2003.) This has been one reason why railroads have been losing market share to the trucking industry despite their massive cost advantage, but other railroads are now trying to emulate CNI.

CNI has also made some smart long-term investments under Harrison; in particular, it contributed capital to help build a new port north of Vancouver to serve Asian markets. Given the congestion at other West Coast ports and the fact that CNI will be the only railroad serving the new port, this investment will likely pay off well, despite its short-term costs.

Richard Kinder
 Kinder Morgan  (KMI)  
This is Kinder's fourth straight year as a nominee, and so I won't spend too much time re-hashing his story. Shareholders have done very well under his stewardship, with owners enjoying a 28.9% annualized total return since he took the helm at the limited partnership Kinder Morgan Energy Partners  in early 1997. Returns have been similar since Kinder took the helm in 1999 at what is now the parent company, Kinder Morgan (KMI). Kinder's compensation is tightly linked to the firm's performance--he only gets $1 in salary, with the rest of his pay coming only from distributions and dividends paid from his (sizable) stakes in these companies. This year has seen more action than usual for a slow-moving pipeline operator, with Kinder buying Canadian pipeline operator Terasen and announcing a large greenfield project to bring natural gas from the Wyoming Rockies to Ohio.

John Mackey
 Whole Foods Market 
Mackey is also a repeat nominee from 2004, and it's not hard to see why. Whole Foods continues to thrash every traditional grocer in sight, and shows no sign of slowing down despite the toll that  Wal-Mart (WMT) is taking on the industry. It's especially impressive that despite the company's torrid growth, Mackey returned excess capital to shareholders in 2005--via a special dividend, a hike in the regular dividend, and stock repurchases--when the firm realized that it was generating more cash than it could effectively deploy.

Whole Foods has excellent financial disclosure, and solid--if not spectacular--corporate governance. We like Mackey's very reasonable level of cash compensation, but we're not fans of the firm's heavy options issuance nor the charge it took earlier this year to accelerate vesting of options ahead of mandatory option expensing.

Robert Silberman
 Strayer Education (STRA)
I first became aware of Strayer a few years ago when a colleague mentioned that he'd just read one of the best shareholder letters he'd ever come across. He posted it on the wall here at Morningstar (yes, we're geeks), and I had to agree with him. The letter was from Strayer CEO Robert Silberman, and aside from speaking candidly about the firm's business model, challenges, and opportunities, it contained one line that jumped out at me: "We view our stock as precious and will only issue shares reluctantly and when we are convinced we are getting fair value for what we are giving." Needless to say, I don't think this a common sentiment among most CEOs.

Although Silberman is fortunate to run a business that naturally has wonderful economics, since taking over the reins he has improved already-high returns on capital, reversed a declining enrollment trend that is now growing at a healthy clip, and successfully opened a number of new campuses. Moreover, he and his team have pursued a different path than many of their peers by focusing first on providing a quality education, and assuming (correctly) that enrollment growth will follow. We think that being less focused on sales and marketing has kept Strayer out of the regulatory issues that have embroiled many of its peers. Shareholders have benefited from this approach, with Strayer's shares tripling since Silberman took over in early 2001.