I met Trevor Eastwood at UWA Business School last Sunday. Trevor Eastwood was the former CEO, board member and Chairman of the board of Wesfarmers Ltd. Under his leadership as CEO, the market capitalisation of Wesfarmers rose from $27 million in 1983 to $1 billion in 1994 when he stepped down for Michael Chaney to take over, which corresponded to approximately 40% compound annual growth rate of return.Please find below the key points summarised from Trevor Eastwood's new biography entitled "The CEO, the Chairman and the Board - Trevor Eastwood" by Rosemary Sayer:
On the benefit of studying engineering on solving business problems (p. 39 - 40): "Eastwood feels keenly that engineering gave him a stronger foundation in business principles because it was all about problem-solving. Formally defining the problem - which isn't always what you first think - writing it down and designing a solution through a logical process, are a set of skills everyone should have ... He laments that problem-solving as a discipline doesn't play a big enough role in today's educational syllabus."
On where to start one's career (p. 46): "The deep end is the only place to start."
On negotiation protocol (p. 74, 121): "But Eastwood made a mistake he was never to make again in his career: going into a negotiation on his own. Still feeling the need to prove himself ... Eastwood thought it would have been seen as a sign of weakness to take someone along. ... He found himself negotiating with several members of the Smorgon family at the same time.... Eastwood made it a rule [to] never to get too closely involved... If the ultimate decision-maker is involved heavily in the negotiation, there is the risk that spent emotion and effort increases the urge to win at any cost."
On how he first arrived at his key insight on what makes a great company (p. 79-80): "[Eastwood] also undertook a major study of the top 100 companies on the Australian Stock Exchange to understand why successful businesses made money and grew when others did not. ... he concluded that ... the single most common characteristic of successful companies was a high return on shareholder funds, regardless of the complexity of the business model. This simple conclusion was to have a profound effect on Eastwood's thinking and on Wesfarmers' success in years to come."
On the need to be able to measure return on shareholder funds of company's divisions (p. 84): "In a diverse range of businesses it was important to know where the company was making money, and whether it was achieving an acceptable return on investment. To implement a system that measured investment performance, each business unit needed a separate balance sheet."
On the need to have good people around you (p. 89): "There's something very special about working with the best and the brightest people every day. Wesfarmers has been able to attract and retain these people."
On applying the common measure and objective of superior return on equity to manage businesses (p. 113-114): "1. If your business is currently operating above our satisfactory hurdle rate for return on capital [25 per cent EBIT to capital], you are to develop a plan to grow your business as quickly as possible subject to new investment meeting our investment criteria. 2. If your business is currently operating below our satisfactory performance hurdle [20-25 per cent EBIT to capital], you are to develop a plan to improve your return on capital that may or may not include additional investment. 3. If your business is below our minimal rate of return [<20>On managing the divisions after the key measures (see above) are in place (p. 116): "Under Eastwood style of leadership, Wesfarmers' divisional chief executives were given absolute authority to run their business units with very little interference from corporate management. However, they could expect very close scrutiny... if they were not meeting their performance targets."
On business development (p. 120, 122): "...its active new projects list was long, so the process of assessing an acquisition or investment was an important feature of this growth and success. ... only if it was passed unanimously by them [project leader, CEO and CFO] would a paper be prepared for the board.... For every project that was approved, many were reviewed and turned down. Some were rejected outright at an early stage, some did not interest the company, some did not meet its financial criteria and some just did not work out as planned."
On key mistakes he made (p. 159-160): "The 1987 acquisition of Charlie Carter supermarket chain in Perth was one of the major mistakes he made as CEO of Wesfarmers... Wesfarmers was not in a position to scale up and meet the competition. ... Wesfarmers ran Charlie Carters into the ground." "Eastwood concedes he made mistakes by keeping people who weren't up to their jobs for too long. In hindsight, it was usually for all the wrong reasons, like misplaced loyalty to a person, or because they had served the firm for a long time. ... [Eastwood said,] 'If the decision is made to terminate someone, I have learnt it is wise to get on with it quickly.'"
And from his talk at UWA Business School on Sunday, 3 May 2009:
On the importance of getting good people: "If you find a good person, don't wait until you have a position in your company, get him or her first and CREATE a position."
On what businesses to acquire: "You have to be able to add value, as you would be paying market price. Otherwise, it has to be significantly cheap."
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