Three Frontrunners for CEO of the Year 2012

Jason Stipp: I’m Jason Stipp for Morningstar.

Every year our Equity research group gives out a CEO of the Year Award for exemplary stewardship in the corporate suite. Here to talk about the candidates for the 2012 award is Heather Brilliant, global director of equity research.

Thanks for joining me, Heather.

Heather Brilliant: Thanks for having me, Jason.

Stipp: Before we get to the candidates, let's talk about the criteria for becoming a candidate for this award. We’ve been giving it for a few years now. What do you look at for that signpost of great stewardship?

Brilliant: So we look for a couple of different things, but the first is really a track record of strong execution. So no one can get a CEO of the Award by simply having a single good year of execution or company performance. We’re really looking for someone who has worked to build their company’s economic moat and to invest in the areas of the business that we think can lead to the greatest return for shareholders.

The second is really capital allocation specifically. So has this CEO made strong capital allocation decisions that have really helped shareholders to do well over the long term.

Third, we always have a "why now?" component, so why would we consider this particular CEO in 2012 as opposed to 2011 or 2013 or anything like that.

So those are really the three criteria we use.

Stipp: We have three candidates for the 2012 award. They come from a couple of different broad sectors. The first one is an oil-services company CEO. What's the story and why was he candidate this year?

Brilliant: So it’s Merrill Miller from National Oilwell Varco, and we have nominated Merrill Miller as one of our three finalists because we think that he has shown a really exemplary commitment to corporate stewardship at his company and also has a track record of very strong execution.

One thing that I think really differentiates a couple of the candidates this year, but National Oilwell Varco in particular, is that we have upgraded the company from no-moat to wide-moat over the last several years. Of course, management by themselves cannot establish the moat of a company, but they can certainly make the right investments and capital allocation decisions to help a business really grow into their own with regard to the position that they have in the overall industry. And we think Merrill Miller is a great example of a CEO who has done just that.

Stipp: Second candidate is from the pharmacy benefit management industry; this is an area of health care, specifically as it relates to how folks get the drugs that they need.

What’s the story behind this company and the CEO, and why is he a candidate?

Brilliant: George Paz of Express Scripts is our second candidate, and Express Scripts is a really unique company as well. It has grown from being one of the smaller players in the industry to the largest pharmacy benefit manager by more than 50% in terms of revenue. So that’s been a tremendous amount of growth.

But more interestingly, I think, is that, just like National Oilwell Varco, we have taken the moat rating on Express Scripts from none to wide over the last few years, and we think that George Paz has a lot to do with this, because he has made a lot of investments both in the ongoing business of Express Scripts, but also from an M&A perspective that have really allowed the company to build the scale that it takes to have a moat in this industry.

Stipp: Last company also from the health-care industry, this time in pharmaceuticals. It’s a narrow moat company. Talk to me about the CEO of the company and your thinking about why he is a good candidate?

Brilliant: Our third candidate is from Valeant Pharmaceuticals; it’s Mike Pearson.

We think that Mike Pearson has done a really great job of taking a business that was kind of a ‘me too’ player in the smaller end of the pharmaceutical space to being a business that we think is really well run with regard to the investments that they’re making. And Valeant has really differentiated itself with its business model, which is something that we think is a particular aspect that the CEO can have a quite a lot of influence over.

Mike Pearson has a background in investments and in really thinking about the strategic allocation of capital, and so we think he has really brought that perspective to Valeant in a successful way.

Stipp: It sounds like three strong candidates for annual award. We’ll be announcing the winner of our 2012 CEO of the Year Award in the first week of January 2013--that will be done by Paul Larson, our Equity Strategist.

Thanks for joining me today and giving me the details on those candidates.

Brilliant: Thanks for having me.

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