US corporate governance is based on the basic principles of operational freedom for the management, who is bridled with responsibility enforced through boards' oversight. While this appears to be a great setup for optimal operational performance, human nature and erroneous judgement dilute the practicality of this framework. The three corners of the corporate triangle, the shareholders, the board and the management ceases to be in sync and rhythm is often missing. It is sometimes felt that stakeholders are more concerned about their individual interests rather than the overall good of the organizational. This narrow vision gives rise to events like financial frauds and collapses, which decrease the trust of ordinary citizens in the strength of the corporate governance system of America.
While it is true that there is some element of futile friction amongst these three participants, the picture is not always so bleak. Some companies have charted courses, based on ideologies and policies, which speak volumes about the possibilities of the goodness which can be achieved. These companies are usually led by visionaries during various stages of their history & evolution.
One such company is the “mini” steelmaker giant, Nucor Corporation (NYSE:NUE). Nucor, headquartered in Charlotte, North Carolina, is the largest steel producer in the US, with a capacity of 27 million tonnes. It also boasts itself to be the largest recycler of scrap steel in North America, using it as the main raw material for production. The recent growth story of the company has been extra stunning with the revenues increasing from $4.756B in 2000 to around $19.429B in 2012. The company has been able to substantially recover from the economic downturn after the financial collapse of 2008. The excellent performance of Nucor is based on the internal strengths of the company, which find roots in the famous Nucor corporate culture.
Much of the recent success of Nucor is attributed to Daniel DiMicco, who was the CEO of the company from September 2000 to January 2013. Dan DiMicco, who is now the Executive Chairman, is credited with achieving remarkable growth and profitability by supporting and further strengthening the Nucor beliefs. He successfully managed the transition of Nucor after its legendary founder, Ken Iverson, stepped down. DiMicco's tenure was marked with numerous acquisitions & capacity expansions, which helped the company reach the top of the ladder in the US steel industry.
The foundations of the corporate governance philosophy of Nucor are built on the basic pillars of justice and fairness. While safety of its workers is priority number one, efficiency and production statistics are also at the top of the management's mind. The pay is directly linked to the performance of the workers and management. This has helped create a sense of ownership amongst the employees. The workers are called “teammates” and there are only 5 layers of management. This flat hierarchy is supported by employee empowerment, where managers are allowed to take significant decisions which are nearly impossible to imagine in taller organizational structures. Tolerance for bonafide mistakes & experimentation is part of the work culture of Nucor, which supports innovation and continuous process improvement. This brings a sense of personal responsibility, integrity and long term commitment to the mindset of its staff.
DiMicco preached & practiced these philosophies and also added value by taking up bigger issues troubling the manufacturing sector of USA, especially in light of the might & clout of China. DiMicco has been a strong proponent of “rules based free trade” and helped create the required noise about problems being faced by US manufacturers due to cheap imports. His leadership role in uniting the manufacturers has given him a near cult status in front of the employees of Nucor Corporation (NYSE:NUE). He continued the practice of “pain sharing”, where the top management took pay cuts before other employees were required to do so.
In fact, Nucor was able to avoid massive layoffs during the post 2008 period and executive compensation was not increased in 2010 due to the net loss suffered by the company in 2009. Improving the environmental impact of the company was always a key focus area of DiMicco. He supported adoption & development of better technology, which catapulted Nucor to a leadership position on this front as well.
The success of Daniel DiMicco is based on a very rudimentary management concept of leading by example. If a CEO genuinely supports employee empowerment and is known to be an honest & intelligent leader, even outside the organization, workers are naturally inclined to be more loyal & sincere. The culture of honesty & integrity helps reduce inefficiencies in operations, as workers are motivated to contribute more. All this helps increase productivity and profitability. Importantly, if the CEO achieves success based on moral corporate values, the board feels empowered and obliged to ensure more meticulous & meaningful oversight.
Nucor has been fortunate to find people like DiMicco, who believe and understand the vision of its founders. The financial success of the company and the satisfaction of its employees proves that good corporate culture strengthens corporate governance mechanisms, which ultimately promotes the maximization of shareholder's wealth. The shareholders are not complaining. The shares of Nucor have significantly outperformed the market over the years & Nucor has an enviable track record of uninterrupted dividend payments for the last 159 quarters. The return on equity has been a healthy 6.66%(TTM) and the return on assets has been a remarkable 4.14%. EPS has grown from $0.37 in 2001 to 2.45 in 2011.
John J. Ferriola, who succeeds DiMicco as CEO of the company, will obviously be expected to continue the good work done by DiMicco. While the legacy and the legend may be difficult to emulate, the Nucor corporate governance culture will always be there to guide Ferriola. This, albeit unusual, corporate culture has stood the test of time and it is hoped that it will also be able to meet the challenges of the recent transition at the top.
Nucor Corporation (NYSE:NUE) is one “good example” of synergies possible between good organizational culture & supportive corporate governance. Ultimately, good corporate governance boils down to the intent of the management, board & shareholders.