Seven CEOs Who Earn It

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In looking for the new Mr. or Ms. Good CEO, experts fret that in their disgust, Wall Street watchers will construct a new set of criteria that is as restrictive as the 1990s were permissive. "The debate is being framed around the bad apples," Harvard professor Rakesh Khurana says. "Companies may conclude, 'Instead of hiring b-school students, we should hire divinity students.'"

The proof, as they say, is still in the pudding. Instead of relying on intangibles, took a performance-first approach to find seven entries for a Good CEO Portfolio. We screened for companies that have outperformed the broader market in several key areas: earnings, revenue and share-price growth over five and 10 years, as well as market-beating return on equity. Our screen turned up 97 companies -- and the results were interesting.

What did we find? First, a sector anomaly: The past 10 years have witnessed an unprecedented housing boom, which resulted in nearly a dozen homebuilding and mortgage-related companies turning up on the list. This decade-long boom lifted all boats, so we'll demur on choosing a CEO from this group -- the next five years will surely separate the skilled from the lucky.

The remaining companies represented a broad cross-section of sectors and market caps. However, unifying themes emerged: The majority are run by founders, scions of founders or people who worked their way up from the inside. The CEOs tended to have longer tenures. With a few notable exceptions, the list was free of high-profile CEOs. The companies also shared a disciplined culture that promoted from within -- supporting the findings of Jim Collins, author of "Built to Last" and "Good to Great."

In winnowing our Good CEO Portfolio down to seven, we only included companies in which the CEO was at the helm for at least five years. That excluded many well-run companies that passed our performance screen -- including Amgen ( AMGN), AutoZone ( AZO), Best Buy ( BBY), Fiserv ( FISV), Johnson Controls ( JCI), Microsoft ( MSFT), SunGard ( SDS), Timberland ( TBL).

Lastly, we factored in one vital intangible. Management consultant Douglas Smith cautions that a major shortcoming of the past decade was the focus on a company's shareholder value to the exclusion of its value to both customers and employees. You can't have one for long without the others, Smith says. In choosing seven companies for the Good CEO Portfolio, we chose companies with a history of high marks from employees, customers and shareholders.

Without further ado, here is the Good CEO Portfolio. Some of the names may be new to TSC readers, so we plan to run profiles of these companies and their leaders in the coming weeks.

1. Arthur J. Gallagher's J. Patrick Gallagher

J. Patrick Gallagher is the grandson of company founder Arthur J. Gallagher ( AJG). Since the insurance-brokerage company's creation 75 years ago, every CEO -- three in total -- had the same last name. While one could accuse the latest honcho -- president since 1990 and CEO since 1995 -- of winning what Khurana calls "the ovarian lottery," his record puts that notion to rest. During his tenure, the company has climbed from being the eighth-largest insurance brokerage in the world to the fourth. Arthur J. Gallagher has also smartly diversified into risk-management and financial services under Gallagher's watch, in part through acquisitions. The Itasca, Ill., company's stock -- publicly traded since 1984 -- has taken its lumps this year, including slipping to a 52-week low of $21.70 in July after the company's earnings fell a penny shy of estimates. However, the company says it missed because of costs associated with a hiring spree, cherry-picking from rivals such as AON.

Also, Gallagher doesn't comment on earnings estimates from Wall Street, so missing projections -- which Stephens Inc. analyst Nik Fisken says may happen again when it reports third-quarter results Oct. 23 -- doesn't mean as much as the company's strong long-term growth prospects.

2. CorVel's Gordon Clemons, Jr.

Gordon Clemons, Jr. founded this Irvine, Calif., company in 1988. CorVel ( CRVL) helps companies such as Wal-Mart ( WMT) keep their workers' compensation and health care costs down -- a highly profitable niche with good growth prospects (15% annually) and not a great deal of competition. The 58-year-old Clemons, who owns about 10% of CorVel, hasn't spent much time currying favor with Wall Street, but he has made shareholders and customers very happy. The company also has a squeaky clean balance sheet and is buying back loads of shares.

3. Dell's Michael Dell

Michael Dell gives high-profile CEOs a good name. The eponymous chairman and CEO's career is so well known that it's part of Wall Street's collective subconscious. Founded Dell ( DELL) in 1984 at age 19. Pioneered the direct-marketing approach to PCs. Went public in 1988, leading to a 21,599% increase in Dell's stock. We could go on, but let's get beyond the CEO and look at the company he built: The PC maker is on par to post sales growth north of 20% -- and this is a company with $32 billion in annual sales. And if that isn't enough to ensure continued growth, Dell is making a successful move into the vast enterprise market and is looking to make a splash in the printer arena as well.

4. Eaton Vance's James Hawkes

For a company known for moving slowly and deliberately, its sales, earnings and stock price seem to grow quickly enough. Eaton Vance ( EV) has quietly evolved under the leadership of James Hawkes -- who joined the Boston company in 1970 and became CEO in 1996 -- from a small bond house to a burgeoning player in the money-management business. Deliberate decision-making runs through the company, from sidestepping the tech-stock bubble in the late 1990s to the company moving into high profit-margin arena of wealth management known as separate accounts -- which allow wealthy individuals to own baskets of managed investments. Under Hawkes' stewardship, the company has outpaced its peers and its growth prospects remain strong -- and the stock's P/E of 15 makes it the kind of sound investment Eaton Vance's funds would unearth.

5. Expeditors International of Washington's Peter Rose

Call him the anticelebrity CEO. Peter Rose, the 59-year-old chairman, CEO and cofounder of this Seattle transportation-logistics company has gained a devoted following for the irreverent remarks that dot his company's 8-K filings. These filings often include responses to analysts' questions (since the company eschews quarterly conference calls, this is the only time it deigns to answer their queries), such as the following response to a question about its currency exposure: "We have always politely refused to engage is this meaningless exercise. It is our view that this is an irrelevant calculation foisted upon the financial community by companies trying to mitigate the announcement of below-expectation results." So, for starters, Rose wins points for honesty and plain talking. This alone isn't a reason to invest in Expeditors ( EXPD), but there are plenty of others: High marks and numerous awards for service to customers and employees, strong earnings and revenue growth, and a growing customer base.

6. General Dynamics' Nicholas Chabraja

Nicholas Chabraja doesn't talk to the media much. But he doesn't need to: General Dynamics' ( GD) performance does the talking for him. The 59-year-old former lawyer joined General Dynamics after successfully defending the company in a government lawsuit in 1992, quickly ascending to the CEO post in 1997. Like other aerospace-defense companies, General Dynamics has been a benefactor of President Bush's military spending increase, but Chabraja's company stands out among its peers. Its 19.4% return on equity more than doubles the industry average. While the company has had some problems in its shipbuilding operations, its balance sheet is nearly debt free, and the company's cash hoard may get put to good use in the coming year. The company's stock also is cheaper than that of many of its peers on a P/E basis. General Dynamics' performance speaks volumes, and it says that Chabraja is the best executive in his industry.

7. Sonic's Clifford Hudson

It's not every day that a CEO gets put in charge of a fund to protect investors when a failed brokerage firm is liquidated. But not every CEO is like Sonic's ( SONC) Clifford Hudson. Hudson, the 47-year-old chief of this Oklahoma City-based drive-in restaurant chain, counts among his career highlights his presidential appointment in 1994 as chairman of the Securities Investor Protection Corp. Investors may find his 17-year tenure at Sonic, including seven as president and CEO, even more notable. In the past five years, Sonic's annual sales have doubled to more than $2 billion, while annual earnings growth exceeds 20%. Sonic's expansion plans -- adding 200 restaurants this year to its 2,400-strong chain, pushing into 21 new states -- should help it meet its 18%-20% earnings growth targets. Meanwhile, the company gets high marks for branding, customer loyalty and employee training and retention.

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