The Fund Manager John Neff: 'I always did ask the hard questions.'. (A Life in Governance).

"AS A YOUNG SECURITIES ANALYST, I was limited in my knowledge of boards and how to analyze the quality of the directors. Boards were certainly more of an old boys-type club in those days. What I did find surprising was that you actually had brokerage guys on boards who would peddle monthly earnings to the investment community -- not selling the reports but providing them as part of a continuing relationship kind of thing. I can remember one company which I was particularly close to and which shall remain unnamed that would send me their monthly earnings. It was a conglomerate involved in many different parts of the economy, so I just loved having this information. We had a big holding in it so they probably felt that they were fulfilling their obligation to the investors. Those times were a bit different from today.

In 1979 I wrote in Institutional Investor magazine that it was the obligation of institutions to make their voices heard. That was a kind of watershed statement. The popular institutional exit strategy at the time was to vote with your feet. Yet you just killed the stock if you had a sizable position. And of course you would probably be selling it at just the wrong time. Unless the company was a disaster, this just didn't seem to me to be the right way to go. So we developed an inclination to be a bit more forceful in regards to corporate governance.

If we weren't getting any satisfaction in our normal contacts with management, what we would do is write letters -- and we wrote a lot of them -- to the board, particularly to directors who were members of brokerage firms. We weren't about to ask for anything ridiculous. What we wanted was more of a qualitative discourse. We were just trying to do well for the shareholder.

There was a situation where I owned B.F. Goodrich when it was just a tire company in Akron. It was a cheap stock with pretty good cash flow and I was after them to buy the stock in, which made a lot of sense when it was selling at five or six times earnings. Well, Goodrich went out with its low P/E stock and bought, at 14-times earnings, an industrial roofing company. We made the case to John Ong, who was their strong CEO, and to John Weinberg of Goldman Sachs, who was a director, that it would be so much more productive for the shareholder if they used that money to repurchase their stock. "Where is it written that you have to buy this?" I asked Ong and Weinberg. "There are alternatives."

When those conversations weren't productive, I finally got a little irked and I wrote a letter to the entire board. I said that in my discussions with Ong and Weinberg that they had been "polite, patient, and platitudinous?' I got a note back from Weinberg: "Many things I have been called but never platitudinous." [Laughter] I reminded him of this incident when he came to a dinner that Goldman Sachs had for me after I retired. We jousted at other companies too and it was usually a productive exchange.

I recall one CEO telling me, after the board got a letter, that it "disquieted my directors." My directors. And I said, "Good!" Oftentimes, however, the responses to our letters would be pedestrian. It was rare that we would hear from an individual board member. But this is what we felt we had to do -- to plant some seeds here and there, to raise the consciousness.

I do feel that this kind of interaction we had with boards was worthwhile. I can point to some cases where it obviously didn't make a difference, but there are cases were it probably did, although you can't be certain. And, in some fairness, in some examples where it worked, the market spoke to reinforce what we wanted to happen.

We were careful not to overdo this or to wear it on our sleeve, because it can be overdone. For the public funds it became kind of an ego trip, trying to get involved in the process of electing new management and trying to influence things in areas where I don't think they have the skill set. Some of the standards they've come up with are useful, and some of the lists that they put out of managements and boards not doing their job are a necessary needle, and the public funds are the only really tenacious body that seems to have the time and scrutiny to give to this. I just wish somehow it was in better hands, one more capable and less ego-intent.

Although the New York Times called me a "Kerkorian director" on the Chrysler board, I clearly was not that. I even tried to get the Times to issue a retraction but they wouldn't. As a fund manager I did support Kerkorian because he was asking the right questions of Chrysler management. What is more, he was buying the stock when there weren't too many people out there buying it. When Chrysler put a limit on his purchases, I took some umbrage with that. Kerkorian wanted three board seats and Chrysler gave him one, and we were both appointed at the same time. I was a director representing the shareholder interests, but so was everybody else -- at least they were supposed to.

Bob Eaton, who came to Chrysler from General Motors, really didn't know me. As a longtime major holder of Chrysler, I knew Lee Iacocca and Robert Lutz and all the hierarchy who preceded Eaton. He and I spent some time together, got to know each other a bit, and at the end he asked me, "You aren't going to micromanage, are you?" And I said, "No, but I'm going to ask a lot of questions."

I always did ask hard questions. He'd bristle once in a while at my questions, but I always thought we had a good relationship. In retrospect, I'm not so sure because I did not get asked to join the DaimlerChrysler board following the merger -- and never got any communication as to why I didn't. Now maybe he didn't like the circumstances under which I was made a director, or didn't like how I handled myself as a director, but I thought I was the best director on the board. From my years of investing in the company -- I was by far the largest outside shareholder -- I probably knew more about Chrysler and its business than any other board member. In other words, I didn't get a lot of what you would call "new inside information" sitting on the board. Now I obviously wasn't the only director not selected for the new board, and in truth I wasn't looking forward to going to Stuttgart five times a year. I wasn't a young man at the time but I still have pretty good stamina. I didn't even go to the last board meeting, which was a party. I told one of the executives, "I'm not going to my own wake."

I was on the Chrysler board for two years and eight months, and I did enjoy it. I have a kind of "four wheel" personality and although I wasn't an engineer, I knew the product almost as well as the executives and I could ask some questions that the other directors couldn't. I voted for the merger with Daimler as a way to enhance shareholder value. Chrysler was selling at a five or six multiple and Daimler was at 14 times, and they were offering a price that would give us a blended P/E of about nine times or so. I thought there would be some beneficial synergies. We hadn't done much internationally, so this could be an avenue for putting more of our product into foreign channels. We also weren't on the forefront of some of the newer technologies, so with their superior engineering we could be better prepared for the future. When I look back on the Chrysler experience, I guess I am most proud of asking the hard questions and providing the board with some kind of an institutional investor viewpoint -- being a so unding board for how certain actions would be interpreted in the investment community.

Boards certainly are not the old boys club that they used to be, although they still aren't always as good as they should be. They do have an obligation to represent the shareholder, recognizing that they serve other bodies as well. You're seeing that obligation manifest itself more forcefully these days on audit committees. Audit committees were derelict when some of the catastrophes of the last two or three years happened, be it Oxford Health or Rite Aid or Cendant. I don't mean to say that all of those problems were perceivable, but if you had more of an aware audit committee, you would have asked more telling questions. And guess who is about to become chairman of the audit committee of Crown Cork & Seal? [Laughter] How about the delightful irony of that! Audit committees and the song and dance they go through now, aided and abetted by the auditors, are more intense than they were four or five years ago.

The kind of good analytical prowess that you develop as a portfolio manager is what I find a useful skill as a director and what I try to bring to the boardroom. Boring in, testing management, trying to help them scope out commercial opportunity, and, in some cases, holding back delusions of grandeur they may have in trying to do too much too soon. Not being a burr under the saddle but just bringing a good head to the table. One of my neighbors once said, "You must be hell to live with -- you analyze everything!" And I thought, "That's pretty close to the truth."

RELATED ARTICLAE: John Neff began his investment career in 1955 with the National City Bank of Cleveland, becoming head of securities analysis for its trust department in 1958. He joined Wellington Management Co. in 1963 and was named manager of its Windsor Fund in 1964, when it had assets of $75 million. Utilizing a rigorous value-based discipline, he proceeded to compile an enviable record of beating the market in every imaginable investment climate. When he retired at the end of 1995 as managing partner of Wellington Management and portfolio manager of the Windsor Fund, the fund's assets were in excess of $14 billion and his reputation as a "legendary" investor was secured. He was named to the board of Chrysler Corp. in 1996, serving until its merger with Daimler Benz, and is currently a director of Amkor Technology Inc., a provider of packaging and test services for the semiconductor industry, and of Crown Cork & Seal Co., a packaging manufacturer. His book, John Neff on Investing, was published in 1999.