Against the Grain: How to Succeed in Business by Peddling Heresy
In Against the Grain, Joel Stern shares for the first time, not only the story of how EVA swept the corporate world, but the story behind the story-the intellectual underpinnings of EVA, how he and his colleagues at Stern Stewart & Co. promoted the concept, won its initial acceptance by major corporations, and later turned the concept into a revolution. He has for good reason been called a one-man catalyst for change. In an engaging memoir, he has given us not only an account of his business strategy, but also provided fascinating anecdotes and vignettes of encounters with leading businessmen on four continents.
Joel M. Stern (New York, NY) has been the Managing
Partner of Stern Stewart & Co. since its founding in 1982 and
was coauthor of The EVA Challenge (Wiley: 0-471-40555-8). A
recognized authority on financial economics, corporate performance
measurement, corporate valuation, and incentive compensation, he is
a leading advocate of the concept of shareholder value.
Irwin Ross (New York, NY) was retained to write The EVA Challenge with Joel Stern and John Shiely. He is a former roving editor of Reader's Digest and over the years has written for Fortune and a variety of other magazines.
Foreword by John S. Shiely ix
Chapter 1 The Great Break 1
Chapter 2 Beginnings 9
Chapter 3 Rebel Banker 23
Chapter 4 A Letter from Oppenheimer 49
Chapter 5 On Our Own 63
Chapter 6 How We Grew 77
Chapter 7 The Key Role of Incentives 91
Chapter 8 The Missionary Way of Life 99
Chapter 9 Dispatches from the Sales Front 123
Chapter 10 As for the Future 133
Chapter 11 The Credo of a Radical Free Marketeer 143
Appendix Heresies That Have Stood the Test of Time 169
Let’s Abandon Earnings per Share 171
Some Thinking to Do 178
What if Capital Markets Are “Efficient”? 181
Fewer Analysts, Please: Why People
Believe Capital Markets Are “Inefficient”! 184
Are “Technicians” an Endangered Species? 187
Are “Fundamental” Security Analysts Necessary? 192
Companies Should Avoid Sharp Swings in Dividends 197
Why Dividends Do Not Matter 201
Risk Matters 204
Photographs appear after page 110.
IRWIN ROSS was retained to assist in the writing of The EVA Challenge with Joel Stern and John Shiely. In addition to this widely popular treatise, he has written several other books, among them The Loneliest Campaign: The Truman Victory of 1948, The Image Merchants, and Shady Business: Confronting Corporate Corruption. He is a former roving editor of Reader’s Digest and over the years has written for a variety of other magazines, including Fortune and Harper’s, as well as Stern Stewart’s EVAngelist.
The attraction is that it may be a more palatable way to pick up business tips, and has lengthy theories presented in potted form.
Both are true of Joel Stern's memoir, Against the Grain: How to succeed in business by peddling heresy. The emphasis here is on peddling, and he is proud of it. "I dash about to sell ideas," he writes in a section on "serious" jet-setting. Not long before his 61st birthday he visited 12 cities, "some more than once", on four continents in 27 days.
Of course, the book also sells Stern Stewart & Co, the financial consulting firm he founded in 1982, which has developed and popularized the concept of EVA - economic value added - "the profit that results after deducting the cost of all capital invested in the firm".
Such peddling of his firm is sometimes irksome, but Stern Stewart's theories on how to measure profit and wealth created for shareholders remain a healthy antidote to earnings per share. Simila rly, Stern's skepticism about share options as a form of remuneration rings true - as well as providing the backdrop for his sales pitch on EVA-related incentives.
But the main interest of Stern himself lies in his unusual combination of academic, entrepreneur and salesman. Teaching has always been an important part of his career and, even if you disagree with him, he makes you think.
The academic side blossomed at the University of Chicago graduate business school. He was drawn there by Milton Friedman's book Capitalism and Freedom, which prompted a Damascene conversion to free markets. There he lived through a revolution in financial theory led by the likes of Merton Miller, Nobel Prize winning economist.
Aware of his lack of economics training, he kept piping up with questions. Finally Miller snapped and suggested he visit the dean's office: "There will be a derringer in the file for you. Please keep pulling the trigger until something exciting happens."
Stern stuck at the financial theory. And he did so on limited means, which prompted his first entrepreneurial burst. As an orthodox Jew, he could not eat in the student mess. His self-catering demanded a fridge, which he bought for Dollars 38 and then rented out to fellow students at Dollars 12 per half shelf per quarter, grossing Dollars 432 a year. "With that towering return on investment, I was convinced that the free enterprise system worked just fine."
He started work at Chase Manhattan Bank and joined the corporate financial research team, where he developed his disdain for conventional accounting and worked on free cash flow analysis. He railed against such gimmicks as "smoothing out" earnings, arguing that it was not so easy to fool the market.
When set loose on clients, he insisted a fee was charged for the analytical service. Giving it away would devalue it - a view that equity researchers in the 1990s would have done better to abide by.
Stern broke away, with some colleagues and backing from a client. Ron Palamara, of Anacomp, asked what the new business was worth. "Dollars 10m," Stern replied - it sounded like a "nice round number". Palamara bought a 50 per cent stake.
Bennett Stewart, another graduate of the University of Chicago, is the firm's other leading light. Stern had recruited him to the Chase team via an interview that involved debating financial theory in a car wash.
Stern's autobiography is short, with the story of the man and the firm taking up a mere 142 pages. The personal side includes his religious devotion and love affairs with South Africa, libertarian politics and a woman he bumped into on a flight to Phoenix. These leaven the mix, although the reader will occasionally ask himself how much he cares.
The final two sections of the book include a question and answer session on such topics as corporate greed and business ethics, and a selection of articles comprising useful short lectures on corporate finance and efficient market theory.
Stern describes himself as a missionary. The term is apt because he realizes that good ideas are worth nothing if they are not published and pushed. Like this zealous role model, he can be irritating - but he is, above all, stimulating. (Financial Times, November 13, 2003)
“…he is above all, stimulating…”(Financial Times, 13 November 2003)
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