Frank Blake - Leading By Example - [Invest Like the Best, EP.377]

30:02And the person who's now running Home Depot was on the team. We had a really strong team. I should have started there. I had a really strong team. What advice would you give involved directors, like the role Ken played and others played, in how to push leaders and steer them? What did they do? Bring us into the room with them at that time. What did they do to push and steer you that was most effective? I can tell you what was most effective with me, and I don't know if that is always true with leaders. But what Ken was great about and what some of the other directors were terrific about was asking a lot of questions and through their questions, going, oh, okay, yeah.

30:47I would have a better answer to that than what I just gave. You got some sense of it from your interview with him. I mean, a phone call with Ken - It's not boring. Yeah, it's not boring. It's not boring. And I can tell you there's not a one of them that I wouldn't come away with, oh, I should have a better answer to that than I just did. I mean, it was training. If you're lucky enough to have a board with some directors who've got real experience and understand how to ask smart questions and you're open to understanding what you don't know. And I was definitely open to that. It helps a lot. You mentioned Reagan.

31:28Randomly, just yesterday, I saw for the first time his, I guess, famous address in Normandy on the 40th anniversary of D-Day, which is a very powerful thing to go watch. I'm a total sucker for that kind of stuff. What was it about Reagan beyond his incredible communication skill and ability that you look back on with interest? Reagan really was, in my view, I try to bracket the politics, but he actually was a really great leader. I mean, I'm politically aligned, but even if you're not politically aligned, he was a great leader. I'll give you one example and an anecdote. I wasn't an important person in the Reagan administration.

32:07Ultimately, I was general counsel of EPA at one point. But I mean, you'd go in for a shake of hands and Reagan wouldn't be able to pick me up from a lineup. But I had no doubt as one of the 100 ,000 or however many people there are who are political appointees in the federal government. If I got an issue, I had no doubt of what my president wanted me to do. I had no doubt. And interestingly, I took that with my goal at Home Depot was, I want the 400 ,000 associates on the floor of the store, if somebody goes and says, what does your CEO want? I want them to be able to give the same answer. Reagan was brilliant at just, I know what the president stands for.

32:59And one of the first meetings of all the political appointees that they had, not all, but a good large number, one of the members of his cabinet got up and said, he does this emotional speech about how much people have given for public service and people have died, like folks on the beaches of Normandy, just very eloquent. And then he pauses and he says, I want you to know what the president wants from you. Silence in the room. And he said, he wants you to be able to take a negative article in the New York Times. And that was the perfect example of understand that you're not here for self-regarding behavior that's going to get you praised in the New York Times.

33:51We have something to do here. If you do it right, odds are the New York Times isn't going to light. And you have to be able to live with that because other people have lost their lives. If I think about the exact opposite of some of these principles, the phrase ivory tower comes to my mind. That's often a phrase used about leaders who are out of touch and not connected to their organizations. So the question I have is, what is the ivory tower behavior that you've seen most commonly amongst other leaders that you've watched or worked with or whatever? Basically, the question is like what to avoid doing that's on the other end of the ledger.

34:28So what to avoid doing is thinking you're funny. When people are laughing, thinking you're funny. I think what you need to internalize is that your organization, you know, the phrase boiling a frog. The organization is effectively boiling the fog of the CEO. Organizations generally are resistant to change, plus or minus 5%. Organizations are generally conflict averse, and organizations generally want to control the behavior of the CEO by filling up his or her schedule, by controlling the information that he or she sees. I say it as an organization because it is So it's an organizational behavior.

35:12It's not the people are bad. It's just this is what organizations do. It's the constant, don't let that happen to you. Don't let yourself get out of touch. You need to have the skip level meetings. You need to be meeting with your customers, your vendors, your frontline people. You need to make sure that people know that they can disagree with you. I think CEOs and leaders lose sight of how much an organization orients to their behavior and their wants. And so if they're not constantly cutting across their own lines in a way, they risk isolating. You mentioned last time we talked this great line, you said two key jobs of the CEO are to allocate capital and allocate people and that the entire organization is built to stop you from doing those two things.

36:06Exactly. That's it. So in my view, to be a successful leader, you've got to allocate capital right. You've got to allocate human resources right. If you do those two things right, everything else will fall in place. If you do them wrong, you can do everything else right. You can have great culture, all the rest. It's not going to matter. What does the organization not want? The organization wants resources allocated, give or take, the same way they were last year. The organization wants, given its choice, I mean, they'd like it if somebody else got laid off, but they don't want to leave. And so they'll more than happily do the trade-off that, hey, our culture is such that no one ever leaves.

36:49We are very protective and kind to everybody. And you're always working against that. You're always working against that. And you need to understand that you're working against that. The number of times that you can see people who make a great pronouncement on, here's the new direction the company's going in. Here's our new strategy. And then if you did the second question, how is that strategy tied to a change in financial or human resources? And you get not much of an answer. You'd say, well, okay. Good luck with that. Yeah. In all of the M &A work that you did across your career, what did you learn was the key to getting deals done, to deal-making?

37:39I had another advantage, which is the person who was in charge really of deals at GE. I might've had a title that nominally would say that, but the person who was really in charge was the vice chair, Paolo Fresco. He ended up running Fiat, just a brilliant guy. And I heard Ken Langone talking about the same thing on your podcast. Deals are not zero sum. The objective of a deal is not to come out thinking I squeezed the last penny out of the person. The objective of the deal is on your side, trying to figure out how can I take advantage of the economic engine of this business in a way that the current owners or current business is not taking advantage of it.

38:27Therefore, make this a positive value creation effort for me. And then I want the other side to be going, yeah, okay, this is a reasonable deal. let's get it done. The small differences of half a gear or something on what you pay is going to be lost in time if you've done what drives the economic engine of the business, if you've accurately understood that. Could you tell us the story more recent of what it was like to be in Delta inside that boardroom during what must have been the most stressful, imaginable period in early COVID when the literal business is not possible to run and how you as a leader there, how the CEO at Bastion and others managed this incredibly difficult challenge.

39:20Just the story I would love to hear. Patrick, first, thanks for asking it because I think, and I've told that Bastion this and the leadership team at Delta, I think this is ultimately going to be written up as one of the great case studies of leadership in a crisis. And I learned a lot while I was on the board with Ed. I learned a lot from Ed on leadership, just a tremendous leader. This was a proof point. So if you can imagine, and this is literally true, in February 2020, we're sitting around the boardroom. And first, we're thinking, this is going to be the greatest year in Delta's history. Second, Jay, we want to make sure that Delta continues to remember some of the difficult times and how you have to be creative in responding to difficult times.

40:10And we were actually talking about, we may need some training module or some video that captures this. Within a month, 95 % of the revenues of business leave. By early March, it starts and then you're falling down the mountainside. It was a really rapid fall. It didn't take a long time for the business to get down to revenues almost effectively disappearing. In that time frame, so in the March time frame, Ed comes to the board and he has a single piece of paper with seven bullet points on it. saying, this is what we're going to do. And it starts with taking care of the customers and taking care of the employees.

41:00And then it goes through all the key elements on the financial side of we're going to raise every dollar we can off of our assets, the planes, and we got to be prepared to park our planes, et cetera. But it was a very clear list of this is what we're going to do in this crisis. And they followed through with it. I mean, we had a lot of communication around it, but fundamentally the pattern was set right from the start. And I think looking backwards, Ed and Delta as a whole is justifiably proud that it never involuntarily furloughed an employee. I mean, that's extraordinary. If you look at that industry, For any industry, losing 95 % of revenues is brutal.

41:50For an industry that is so capital intensive, it's sort of beyond imagination. And as the business exited, if you remember, there were a lot of decisions that Delta made that added cost to the operations when every instinct was to do the opposite. So Delta was maintained an empty middle seat long past the other airlines. So it's very conscious in making decisions that would be viewed as protective and considerate for its passengers. And I think it's part of a longer story of how Ed and his team have taken what seven or 10 years ago, everybody would be saying, this is a commodity business. and he's taken the business and decommodified, made it a business that people are willing to pay extra for the improved customer experience in Delta Airlines.

42:49How did he do that? What were the ingredients of that? The first is it's real. So it's operational performance. And I tell people who are passengers, and if you're not a passenger, hopefully you will be a passenger in Delta. You would be really pleased if you were a fly on the wall at Delta BoardMe because the company would begin with, here's our operational performance. Here's on time. Here's on time departures, on time arrivals, lost bags, involuntary boarding, which never happens, but just a series of customer-focused metrics. How are we doing? Safety issues, whatever it was, all focused on the first premise of getting beyond a commodity is actually to perform better, perform at a high, high level.

43:43And they held themselves accountable. The leadership team gets paid on net promoter score. And so they can tell you what moves net promoter score. And they're always in a drive to improve net promoter score, it goes to the capital allocation philosophy. So if you look over time, Delta has moved away from the smaller regional jets. So now while there's still some in service, odds are you're going to get on a regular mainline airline. And the other part that was really interesting was when we were going through the succession process at Delta, Richard Anderson was a great CEO before Ed. When Ed sat down with the board, he said, here are the three things we need to do.

44:29And they're all pretty much directed towards how do I move this airline away from a commodity product? And he was right on all three and he remained consistent to all three. So it's that vision. But the vision without the execution and without the focus. I mean, you know, Patrick, it's complicated. I used to joke, selling table saws is complicated in its way, but running an airline, that's really complicated. And it's the attention to detail and the focus that Ed and his team have. So the vision is powerful, the execution even more. What have you learned about the financial side of these more complicated businesses, especially in an era where some of the big businesses that people talk about are software businesses where the model itself is kind of amazing.

45:24Often customers pay you cash up front. There's not a lot of financial engineering required to make the thing go and work. Whereas when I think about a business like Home Depot with just tremendous amounts of physical things and places that need to be moved around and stored and to say nothing of an airline where safety is so important and all these things. Bring us into the behind the curtain on the finance side of businesses like Home Depot, Delta, and others like it. Two very different things. So with Home Depot, one of the big changes that we made around capital allocation was we stopped building new stores.

46:04In fact, we took a half a billion dollar write-off and cleaned out our entire real estate pipeline and just said, we're going to grow from our existing store base, which from the financial capital allocation perspective, freed up$2 billion of capital that we could invest in improving our supply chain, improving online and returning to our shareholders. And to significant extent, reduce the capital intensity of the business. That's a whole nother discussion, but it was a really important part of the Home Depot story. An airline doesn't have that. Airlines need the physical assets. It's an asset intensive industry.

46:48Having said that, I think the great leadership teams and Delta are an example of that, start thinking about, okay, what are the adjacent things that we can do that may not be a SaaS model, but that give more leverage to this physical asset? So if you travel recently on Delta, you'd know there's free Wi-Fi. With the free Wi-Fi, you think about you've got however many passengers in a plane that are using the Wi-Fi and the portal of the Wi-Fi is a customer connection that can be shared with other companies that care about that customer. And that's a business model that you can start to build off of the fact that you have this customer base.

47:35Similarly, the relationship at Delta with Amex is an amazing relationship in terms of the loyalty of the Delta cardholder and the value that the Amex cardholder, who's also a Delta passenger, gets. So there are ways of building out around the core part of the business that's inherently capital intensive and difficult into creating value beyond that. They're still tied, but it gives you more flexibility. My belief is, I think Delta is going to be showing the path that as investors start understanding those opportunities within a Delta of real value of the Amex, the real value of having these customers, having these passengers in the plane, the free Wi-Fi, those things are going to help in terms of the valuation of the business.

48:36I don't know if we'll ever get Warren Buffett back in the stock. Maybe someday we'll get him back and we'll stop. If you think back to that decision you made to stop the new store growth, what was behind that decision? What did you see that convinced you that was the right way to go? The first site is for any of your listeners who've ever been to Opelousas, Louisiana. They go to Opelousas, Louisiana. There are two major home improvement stores, a Lowe's and a Home Depot sitting side by side. And no offense to Opelousas, Louisiana. Does Opelousas, Louisiana need two massive home improvement stores?

49:18No. It was, so go back, one of your first questions of frameworks and why don't people change the framework? Well, think about the framework of a retailer, and particularly of high growth. I mean, Home Depot was the fastest growing retailer in the history of the United States, the fastest 10 billion, 20 billion, 30 billion, 40 billion. And the basic economic model was, by the time I got there, we were opening over 200 stores a year. Every time you open a new store, you can count on a certain amount of revenue, certain amount of growth, hopefully some pop growth from the new store. if you thought about what drove your economic engine, that drove your growth.

49:59And if you're an investor, you go, I can model this. I know how many stores you're going to open. I can do my assumptions of what the new store will do one, two, three, four years, model that out and that's your growth. What was absolutely clear when you looked at the financial returns is this was genuinely Wile E. Coyote. I mean, we had just overrun the needs for stores at that particular time, and we're putting stores that weren't really going to be an effective return on cap. The more dramatic stopping it completely and clearing out the pipeline was honestly probably more psychological than financial.

50:49So in my mind, we needed to say, it was like, we're on this life raft now. We got to optimize our existing stores. There's no other choice. We're not building any new ones. So we got to look to the 2000 plus that we have in the ground and we got to figure out how to improve them. And to be honest, a lot of investors said, yeah, no, that's not right. that's a mistake. And then it proved out there was more productivity in the store. And obviously, if you're thinking about an economic model, you're a lot better off getting productivity from your existing asset than going out and spending 2 billion in new cap ads.

51:33But yeah, so it was a combination of going to Opelousas, Louisiana and seeing two stores and then just going, if we're going to be serious about this and even doing it, I can't tell you the number of times for the next three years that I would get presentations on, well, let's come up with a new store model. Let's do something different. Let's start building stuff because that's what everybody was used to doing. What was it like having Lowe's as part of your world? I mean, I guess like Delta American and airlines would be kind of a similar adjacency where you could go to those stores for the same sets of jobs to be done for the most part for customers coming into one or the other.

52:15I know Home Depot is probably two and a half, three times the size of Lowe's by market cap or something. But nonetheless, Lowe's is still more than$100 billion, a huge well-known public company. What was it like having a competitor that was so well-known in the same arena or even tighter than that of job to be done for the customer and seem like a formidable competitor? The untrue answer would be, oh, we just did what we thought was right for our customers and let whatever happened because everything was going to take care of itself. That would be the untrue answer. We had been out comped. We had been losing share to lows for a while.

52:55And so it was a big point to start to gain share. How did that play out? What did you do? What were those conversations like? Was there a Lowe's bullseye in your office? What was the mentality around it and the tactics around it? It's a funny thing. They probably don't do it anymore. I think at some point they decided it was not correct. But the Home Depot cheer used to end with, let's kick ass. And the ass was always blue. Let's kick ass. So that was absolutely, absolutely number one on our site. And Carol Tomei, who's now running UPS, Carol's a wonderful person. And on earnings day, she would always wear blue shoes.

53:40That's so cool. Just to make the point, great leader. But that was one of the things everybody goes, yeah, I got it. If we're not kicking these people's ass, we're not doing our job. Now, Having said that, I'm sure everybody at Home Depot would still, job one is making the customers happy and doing the right thing by the customers and the associates. But boy, don't lose sight of this is still competitive. If you had to design a perfect board in a lab, having been on some very effective boards, a bunch of boards, been CEO reporting to a board, what do you think makes for an exceptionally productive board to the extent there is such a thing?

54:16So two different answers, both the CEO's perspective and then the board's perspective. From a CEO's perspective, my comment to CEOs is you really probably don't need your board until you need your board, and then you really need your board. That's why you pay attention, and that's why this is important. Because when you do need your board, when there is a crisis, when things aren't going your way, you really need them and you need their support. And in that context, as a CEO, when you're thinking about who to put on a board, over-index on mature judgment. And that isn't a statement of age. That's just a statement of who will be cool under fire because you need people who are steady and wise.

55:14I was fortunate. I had lead directors, both Ken and Bonnie Hill, and then Greg Brenneman, who are all that way. That's what you want to get from your board. From the board's perspective, I think the most important thing to try to do as a board is avoid as much as possible the senator from. So sometimes boards can get into, you know, I'm on this board because I have blank expertise. So every comment I'm going to make is about blank. You're really not on the board for blank expertise. If the company really cared about it, they go out and hire an expert. Hire a great executive. Yeah, exactly. So that's a part of your judgment, but don't become the senator from X.

56:02Try to broaden out in terms of how you cover what the company does. And then the hardest part is be willing to be candid, which either candid one-on-one, candid in the committee, or candid around the board table. But you're there to give some candid advice as much as possible, make it relevant and thoughtful, but you're there for some candid advice. And then the final thing is avoid the forensic board member. Don't be the person who's going, I know something's going wrong here and I'm going to waste everybody's time finding out what's going wrong. I mean, if you want to do that in another room.

56:43You really stopped me in my tracks earlier with the story about the grandfather buying materials for the coffin for their grandkid. In closing, any other favorite story that stands out from all this discovery that you did of great stories inside the business that would be held up as a great example of how to be? I guess my favorite, I'll tell this story as a closer, just it's a very Home Depot story, but it was probably the most meaningful for me. In my eighth year or so, wanted to take Ken Langone and Bernie Marcus, two of the founders of Home Depot, and do a store walk with them. And we went to Columbus, Ohio.

57:26We had 30 or 40 associates, about 30 associates around the table to have lunch with Ken and Bernie. For a variety of reasons, Ken and Bernie were not in a good mood going into that lunch. And I'm going, oh gosh, this is just not going to go well. Sometimes they're in a great mood. They weren't in a great mood. They weren't in a great room. We sit down at the table and everybody introduces themselves. And the first person says, I'm so-and-so and I've been working at Home Depot for 20 years. And because of working at Home Depot for 20 years, I now own a house and have sent my kids to college. I can't thank you enough, Bernie and Ken.

58:08You've changed my life. And then there was a version of that from every single person around the table. For me, in the time at Home Depot, and this is a very retail kind of story, no one starts in a retailer. No one goes and gets a job shagging carts at Home Depot or working the register going, this is my career. It's a fill-in job for everybody. Over some period of time, you get it in your blood and you like it and you stay. and you advance through the company and people become, I mean, we do well by our associates. And eventually people can become the most successful people in their family. Literally with, I mean, 75 to 80 % of our store managers don't have a college degree.

59:00These are people who made their own lives. It is the American dream every single day. and it is the most impressive thing imaginable. And the most, I just, every time, you just light up at the stories. And by the same token, for me, I will never forget that lunch and never forget all of those stories. And when I made an effort, I didn't get to do it every week, but pretty much as much as possible every week. Whenever I'd fly into a city, I'd sit down and I'd have dinner with hourly associates, 14, and everybody would describe their life story. If I were to ever write a book, that's the book I'd write.

59:44Because if you ever get down on where we are as a country, you see people who are working really hard, who are developing incredible skills, and who care about their success. And I always came away from those going, this is the highest privilege that I could ever imagine. The opportunity to help. Yeah, I had a lot of great stories. It's a wonderful bridge to my favorite and traditional closing question for you. What is the kindest thing that anyone's ever done for you? First off, I love that question. And it is such an important question. And I will say that one of the things when I retired, because of the example that I saw set by Ken and Bernie and Arthur and others of generosity, one of the things I thought is I need to learn how to be more generous.

1:00:45I'm not generous enough. So that gratitude and who do you say thank you? Who's done a nice thing? Hence, there are a lot of personal, folks who've done amazing things, my wife, my kids, but Ken Langone, hands down. Ken took a risk on me that I think very few people would take in terms of giving me the job at Home Depot. Ken always understates it, but I tell people, which is true, every day while he was my lead director, I got a call from Ken every day. Yeah, most CEOs go, oh my God, that must have been Right. That must have been horrible. And it was actually entirely the opposite. I got so much advice, so much counsel, and so many sort of, I'm behind you.

1:01:33Go get it. And if you think back on the time, it was 2007 when I became CEO. Housing crisis was on us. 2008, everything went south. But the housing crisis was already there in 2007. It was raining frogs. And here was this guy every day saying, it's okay. It's okay. Unbelievably kind thing. Unbelievable. What a true legend that guy is. Yeah, true legend. True legend. And the number of people whose lives he's impacted and reached out and helped, it's amazing. Frank, I've really enjoyed our time together. I love part of and led. Thank you so much for your time and for all your stories today. Thank you, Patrick.

1:02:15This is an honor. I look at the folks you've had on this podcast and I know I am an outlier on this, but it is a real privilege. Pleasure's mine. If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.

1:03:07Thank you.