01Practical Ideas from the Life of a Great CEO and Investor
Roberto Goizueta remains one of the greatest executives and managers in history. During his tenure, the Cuban immigrant grew the value of Coca-Cola’s common shares by more than 3,500%, while cleaning up the mess of his predecessor, which had resulted in the beverage company tied up in everything from shrimp farming in South America to manufacturing plastics. He strengthened, consolidated, and spun-off a substantial part of the bottler network in the form of Coca-Cola Enterprises that now forms the backbone of the Coca-Cola system, and focused on capital allocation with such spectacular results that even Warren Buffett would have to stand up in admiration.
This was the man that gave us wisdom on mistakes ("The moment avoiding failure becomes your motivation, you're down the path of inactivity. You stumble only if you're moving."), on establishing credibility ("State expectations. Met expectations. Repeat."), and on integrity ("The cynics will tell you that the good you do today will be forgotten tomorrow. I say, do it anyway."). Here, however, we are going to delve specifically into a few of the key ideas that helped him transform a soda company that had lost market share in the United States for nearly fifteen straight years into a global powerhouse, drowning shareholders in profits, dividends, and share repurchases.
In short, we are going to look at some of the lessons Goizueta can teach us from his day-to-day management of one of the most famous companies on the planet. It is our hope that you can take away from it practical, and actionable, ideas to grow your own net worth or improve your life in some meaningful way.
02Roberto Goizueta Worked for Himself and Viewed Stock as Ownership in a Business
It was thanks to his intelligent stock ownership that Goizueta managed to become a billionaire after fleeing Cuba with nothing more than a couple hundred dollars and one hundred shares of Coca-Cola stock during the Castro regime’s grab for power. The scion of a wealthy Havana family, Roberto was cast out of his homeland and forced to start over, for all intents and purposes, in the United States.
Thanks to his father, he was working for himself in a very real respect. As David Greising put it in I’d Like The World to Buy a Coke: The Life and Leadership of Roberto Goizueta, “… before Goizueta began work, his father had one last request. He wanted Roberto to buy shares of stock in Coca-Cola. ‘You shouldn’t work for someone else, you should work for yourself,’ his father said. He suggested that Roberto should buy 100 shares of Coca-Cola, and lent him the $8,000 he would need for the purchase. The shares were placed in a custodial account in New York, where they remained until his death.” Adjusted for inflation, that’s roughly $58,300 in today’s terms. Before home ownership, before establishing credit, before a fancy car or furniture, the Goizueta family was primarily interested in ownership – whether that meant the acquisition of a company outright, holding a minority stake in a private business, or purchasing shares through the stock market, they understood that the easiest way to amass substantial wealth is through business ownership.
By the time he had rising to the office of Chairman and CEO of the Coca-Cola Company, Roberto Goizueta owned more than 9 million shares of Coca-Cola common stock, and he had never sold one of those original shares. It was practically religious scripture that he wanted to own as much of the company as he could.
03Roberto Goizueta Wasn't Afraid to Look Foolish
According to Greising, “As soon he became president, Goizueta began a detailed study of every aspect of Coke’s business. Although proud and confident in his abilities, Goizueta had enough self-confidence to admit his limitations. He even exposed his lack of knowledge to subordinates by asking dozens of questions ranging from simple queries about market size to complex calculations of rates of return and the present value of invested capital.”
In other words, Roberto Goizueta was a learning executive. Whether you’re a small business owner, middle manager, auto mechanic, schoolteacher, or police officer, the ability to constantly improve your skill set by dedicated, disciplined, and focused learning can make the difference between a dead-end career and a rapid ascent to greater positions of power. You must be willing to risk looking foolish to become knowledgeable.
04Robert Goizueta Treated Return on Capital as Gospel
After assuming power, Goizueta expected his operating chiefs to not only be able to know how to read a balance sheet, but how to focus on the performance. Each business unit was charged a certain cost for capital to fund its expansion products because, as we all know, money isn’t free. Only by exceeding these capital charge hurdles in what is now known as economic value added, were executives praised, compensated, and promoted. In other words, they were paid handsomely for actions that made the owners – the shareholders – wealthier and the company stronger. This is close to the same model used at Berkshire Hathaway by Warren Buffett in setting pay structures for the Chief Executive Officers of the conglomerate’s various operating subsidiaries.
This came as a result of a startling revelation Roberto had upon taking the reigns at Coke’s headquarters in Atlanta. Once again quoting from Greising: “For years, no one had really focused on the cost of capital or the economic return on Coke’s investments. Because Woodruff would not let Austin [the former CEO] borrow money, Austin had responded by fueling his acquisition binge with Coca-Cola stock. But that capital actually cost more, about 16 percent per year, than even short-term bank borrowings would have cost Coke in late 1980. All the businesses except soft drinks – the wineries, the water purification, the plastics, even the foods – were generating less than 10 percent.” The author goes on to point out that Goizueta wisely realized, “We’re liquidating our business, borrowing money at 16 [percent] and investing it at 8 [percent]. You can’t do that forever.”
05Robert Goizueta Knew How to Take Calculated Risks
Diet Coke has remained one of the most successful new product launches in corporate history. It generated tons – billions upon billions – of dollars in fresh cash for Coca-Cola shareholders and increased the strength of the firm’s core brand. Working with his cadre of fantastic generals, chief among which is Donald Keough, the brilliant Omaha native who effectively served as the marketing genius and, indeed, embodiment of Coca-Cola itself throughout his career, Goizueta was able to launch a product that brought an entire new segment of consumers under the corporation’s umbrella.
Yet, it wasn’t a no-brainer decision. The launch was backed by a $250 million initial research budget and then, later, a $100 million first-year marketing campaign; an unprecedented figure at the time. Even in the hallowed halls of “Fortress Coke” as the author called it, this was not chump change and failure would have been a very public embarrassment, both personally and professionally.
06Robert Goizueta Recovered from Disaster
Still, not everything works out as well as Diet Coke. Remember the New Coke fiasco? Coca-Cola emerged stronger because of it. Americans, and indeed those throughout the world, were suddenly forced to realize just how much they loved the Coca-Cola they grew up with that had become such an integral part of Friday night football games, movie showings, backyard barbeques, and family get-togethers. Never forget that you can turn disaster into opportunity. Look for the silver lining in every cloud and you might just emerge better off, wealthier, and more successful.
Sometimes this might not be easy. In fact, the very experience of failing is often painful. You might be able to take solace that you are able to do it in relative obscurity - when New Coke was released, a man actually sent a letter to Goizueta and asked for the autograph of the "stupidest CEO" in history. Roberto complied and sent it back to the man, perhaps poking fun at himself. When you take risks, there is a chance you are going to fall flat on your face. It may not be pretty, it may not be pleasant, and you might want to crawl under the metaphorical rock. Don't. Get up, dust yourself off, and remember that the great investors and business leaders of the past often failed many, many times before making their fortunes.
If you really want to feel good about yourself, take a few minutes to research how difficult it was for Goodrich to develop a process of strengthening rubber. Civilization owes an extraordinary debt to that man, yet he was ridiculed by virtually everyone in his life.
07Roberto Goizueta Understood Politics and Networking
Roberto Goizueta understood politics. Not only did he constantly go out of his way to communicate regularly with the legendary Chairman of Coca-Cola, Robert Woodruff, but also constantly sent letters and kept in contact with an influential network of business leaders. After a meeting with some important Coca-Cola bottlers, he sent porcelain boxes from Tiffany & Company to the men’s wives to thank them for their sacrifice to the company.
This sort of effort is far more enjoyable if you do, actually, enjoy being with people and speaking to them on a personal level. Even if it's a struggle for you, the dividends can be enormous later in your life or career. You never know who is going to rise to a position of power, nor the consequences of unnecessarily alienating someone who otherwise could have been a strategic ally for you and your family.
08Robert Goizueta Kept a Scientific Viewpoint
“Keep the scientist’s candor,” was one of the CEO’s classic tag lines. In essence, this was a way for him to protect against the error that Charlie Munger so often warns us about – twisting data to fit the end agenda that we want rather than letting the facts lead us where they logically would on their own. It means letting go of your preconceived notions, or as Munger puts its, being willing to destroy your own best ideas.
It is a failure to follow this Goizueta philosophy that leads people to throw good money after bad when an investment is going downhill and the intrinsic value has been damaged. It a failure of this principle that leads to religious extremism. Much of society's collective ills could be cured if a vast majority of men and women were capable of taking a scientific viewpoint on matters, with their success measured by performance. If you strive to experience good investment results and a high quality life, your chances are measurably improved by focusing on facts, then rationally analyzing them to determine how you can react in a way that will get you one step closer to your collective goals.
After all, how many people could have curled up and whined about losing all of their power, privilege, and wealth when a communist dictator took over their country? Instead, Robert Goizueta rolled up his sleeves, went to work, and within a few decades, had wrestled control of one of - if not the - most iconic brand in history, while simultaneously generating personal earnings in the billions of dollars throughout his career.
09Roberto Goizueta Knew the Super Power of Incentive in Setting Compensation
The most effective executives know that you are going to get the type of behavior your reward, whether with cash, prizes, status, or power, and less of the behavior you discourage. Many of the problems in the mortgage industry at the time of this writing (2008) were the result of a compensation system that paid brokers based on the total number of mortgages they underwrote without any regard to the ultimate profitability of those loans. This perverse compensation system led to the expected behavior - massive growth in loan sales - without any regard for the bottom line.
Roberto Goizueta understood the power of compensating the behavior you want to reward. As we already discussed in the section dealing with return on capital, Goizueta measured management success as a specific return above a hurdle rate established by Coca-Cola headquarters for use of the money. The effect of this approach was immediate. Bottlers began switching from metal containers to plastic, saving untold millions of dollars in capital expenditures that instead flowed to Coke's bottom line.
One of the single most important decisions you will make in your own life, whether you're talking about raising your children or handling employees, is the compensation system you design. Charlie Munger points out that it was a single stroke of the pen that caused FedEx to solve its deliver problems by tweaking the way package handlers were paid - in short, once the goods were processed through a hub, the workers were allowed to go home and were still paid for a full night of work. Up until then, nothing had mattered: bigger bonuses, salaries, benefits - nothing got the employees to actually do the job on time until you told them they could go home yet get paid the same. The problem was instantly solved. Thus is the power of a good compensation system.
10Roberto Goizueta Kept Things Simple
According to Greising in I'd Like the World to Buy a Coke: The Life and Leadership of Roberto Goizueta, the famous Chief Executive Officer simplified his job into three main tasks:
- The Leadership Role
- The Company's Financial Security
- Delegation of Jobs to Specific Employees or Groups
In a perfect world, Roberto commented, everything would fall into one of these three categories. This is the same brilliant simplicity that you see used by Warren Buffett in his KISS philosophy - short for keep it simple stupid.
Simplicity is the most important key if you want to get ahead. The great fortunes are often built on one or two really good, big ideas. Sam Walton's Wal-Mart was all about delivering goods at a lower price with lower costs and increased volume. It was revolutionary at the time. Disney was about creating great content in animation that was on par with films in main stream cinema. Berkshire Hathaway is about sourcing low-cost capital through insurance subsidiaries and putting it to work in a tax-advantaged way in high-quality businesses that earn big returns on capital. You need to know your central, organizing ethos if you are going to be successful. Otherwise, you will go around reacting to everything all day, accomplishing little but maintenance.
- The Leadership Role