In celebration of their 33 years together as business partners, we asked Tom Quinn to share stories from the early days when he and Gene Hoots started CornerCap. While the entrepreneurial story alone is interesting, we found it equally noteworthy that they were directly involved with two seminal events in US business history: the foundation of ERISA laws for pension management and one of the largest hostile corporate take-overs in history, as captured in the book Barbarians at the Gate. We share some comments from Tom below, for they illustrate the unique history and values of CornerCap.
Gene Hoots and I just celebrated our 33rd year together as business partners (September 30, 1979). The CornerCap team asked that I share some stories about the early days of our firm. In summary, what we did on September 30, 1979 was to setup a private investment management firm for a few friends and fellow executives at RJ Reynolds.
With the enactment of the ERISA private industry pension laws in the mid-1970s, these tax laws effectively forced RJR (1) to fully fund their employee pension plan, which resulted in a rapidly expanding pot of financial assets to be managed, and (2) to be responsible fiduciaries in the management and disclosures for those assets. Prior to ERISA, the small pension fund at RJR was more of an after-thought and a part-time managed activity. Gene and I became the academic and economic beneficiaries of this new pension business as we managed the fund growth over the coming decade – from $200 million to $4 billion in assets.
Our two-man partnership was called CDR Management. The acronyms stand for Contrarianism … Discipline … Realism. These words reflected our key philosophical investment principles at that time, and they represent the principles that all of us at CornerCap live by today. Gene and I were employees of RJ Reynolds at the time, and this private business was completely outside of RJR. However, our supervisor (John Dowdle, SVP & Treasurer) was aware and supportive of this effort to grow our knowledge and experience in investment management. At RJR, the 15 or so outside investment management firms that we had hired were some of the best in the country, and Mr. Dowdle supported the significant learning opportunity that these unique jobs represented. Rather than just hiring and firing managers, we would be buying and selling securities, i.e. learning under fire.
At the startup of our new business together, our only account was the Carolina Equity Fund (CEF), a limited partnership with 15 to 20 investors that Gene had started a decade earlier. Highlighting the support of our new independent firm (CDR) by RJR Management, a couple of years later the company’s investment consultant, Jim Hamilton, was asked to research and make a recommendation regarding the potential for hiring/creating in-house management capabilities at RJR. Based on his recommendations, Gene and I were “hired” because of (1) the performance of the CEF and (2) we were in-place and cheap. At that time, our small group transitioned from the RJR pension management department to RJR Investment Management, Inc. Gene was the president and I was the chief investment officer. Also around that time, CDR Management started another limited partnership, the Carolina Balanced Fund, and it would only accept tax exempt assets.
In 1985/6, Ross Johnson did a boardroom coup at the recently renamed RJR Nabisco. He quickly implemented a plan to replace essentially all of the existing RJR department heads with management personnel from his former companies, Standard Brands and Nabisco (which RJR had acquired in 1985). Being the president of RJR Investment Management, Gene was clearly at risk and decided to take an excellent job offer from Reich & Tang, an investment firm in NYC. As Gene was finalizing the details for his new job, his boss (Mr. Dowdle) and boss’ boss (CFO) were both fired. Gene said that his most difficult task in leaving RJR was finding someone to hand his resignation to.
In 1987, Ross Johnson moved the RJR Nabisco headquarters from Winston-Salem to Atlanta. The headquarters went from 500 to 50 employees, so I was fortunate to receive an invitation. Gene had already left the company and the new RJR Nabisco management had hired a replacement for Gene, Bob Schultz, who was the #2 guy at IBM. He seemed to really like what I was doing with in-house management and especially with our Fundametrics equity research.
An interesting side note came from a comment from Bob Schultz shortly after he joined the company. He told me that Ross Johnson did a blind search for a top pension officer, where the search firm did not know who the client was. Schultz said that Gene Hoots was first on the list from the search firm and that he was second – of course, Gene was the pension officer who was being terminated and replaced.
In 1988, the “Barbarians at the Gate” episode began. Ross Johnson partnered with Shearson Lehman and made an offer to the RJR Nabisco board of directors to acquire the company at a very low price. Later that year he was on the cover of Time Magazine as the new national symbol of “greed.” Other management buyout firms entered the bidding war for RJR and Kohlberg Kravis eventually won. After only two years in Atlanta, the new owners of RJR Nabisco had decided to close the Atlanta headquarters and relocate to NYC.
Everyone knew that the headquarters would be down-sized in the move to NYC and many jobs would be lost. Everyone’s preoccupation was with near term survival. As such, after 10-years of support from RJR management for our small outside investment business, i.e. CDR Management, my boss (Schultz) suddenly decided that I needed to shut down that activity. This meant getting rid of the CEF and CBF funds. The revenues and track records for these funds would be important if I decided to leave RJR or if RJR decided to leave me. Rather than a focus on what was best for RJR and its new owner, Kohlberg Kravis, Schultz and I were focused on our own survival, and those were conflicting objectives.
I decided to not comply with Bob Schultz’s demand. I eventually obtained outside legal counsel to defend me against the sudden Schultz/RJR demands. We ended up with (1) a financial settlement that funded me for about a year in starting our new firm; (2) taking the CEF & CBF funds with us; and (3) also taking the Fundametrics software code, database, and historic data with us. The experience felt like the RJ Reynolds that we all loved had been destroyed in just three years, and the remaining headquarters employees were once again being forced to focus on their own survival … sort of an early episode of a real-life Hunger Games.
On March 1, 1989, I separated from RJR Nabisco and we formally started Cornerstone Capital Corp., using a block-C corporate logo. Although we were unaware at the time, our no-cost crafted logo was the same as Chubb Insurance’s professionally crafted logo. Once discovered and challenged by Chubb in the late 1990s, we changed and registered our name and logo to what it is today. Over the last 33 years, the one unavoidable constant has been (and will continue to be) change.
- ERISA was created because corporations were leaving most of their liabilities unfunded. RJR Investment Management was created to ensure the proper funding, management and servicing of those employees.
- CDR Management was created to bring in-house the unlimited access to and extraordinary knowledge acquired from our RJR outside investment managers, probably the best in the world. These acquired investment principles included (C) Contrarianism from Dean LeBaron at Batterymarch; (D) Discipline from Bob Kirby at Capital Guardian; and (R) Realism from Bill Gross at PIMCO.
- The success at RJR attracted a CEO who became the nation’s leading example of executive greed, and his excessive greed attracted every private equity player on Wall Street. The devastation from these barbarians forced the creation of CornerCap Investment Counsel, a unique opportunity for Gene and me to grow our research; serve our original and expanding client base; and build an organization that would reflect our values about investments and service to others.
- So, what are the changes that will come next? We have built a sizable organization with a loyal client base. Inasmuch as possible, Gene and I are committed to keeping the firm employee-owned and to transitioning ownership to the next generation. While we both enjoy and plan to continue working full time, we must also reflect on our unavoidable mortality. This realism was well stated by Tom Friedman in his book, The World is Flat:
“When memories exceed dreams, the end is near. The hallmark of a truly successful organization is the willingness to abandon what made it successful and start fresh.”
We have 14 employees. Many are employee/owners. We believe that their ethical values will always put client needs ahead of our firm’s needs. We believe that their investment values will always be founded in Contrarian thinking, a consistent Discipline, and Realism beyond the market emotions. Change cannot be avoided. We need younger minds, passions and energy to manage future changes for the long term benefit of our clients and the growth of their assets.