Ernest C. Arbuckle Award Acceptance Speech by John H. Scully, MBA '68

Alumnus reflects on his years at Stanford GSB, including thoughts on free markets, meritocracy and entrepreneurial spirit.

February 27, 2002

Chairman Stein, Dean Joss, fellow classmates, my son Peter and daughter Katie, my brother Vince, faculty, students and friends of the school!

I also want to thank classmate Reece Duca for his gracious introduction.

This is obviously an extraordinary honor for me, even though it is painfully clear that the selection committee must have run out of suitable candidates! It is also an overwhelming honor that the event sold out … but of course that may have had something to do with my offer to friends and classmates of an Arbuckle Award Dinner, all expense paid package to the Bay Area! This included a night at the Fairmont, a Pier 39 tour, bay cruise to Alcatraz, and $20 for Pier 39’s video game parlor. Apparently, our stimulus package sold out the room, for which I am very grateful.

I would particularly like to thank my 38 fellow classmates who have made the trip, a number coming just for this event and taking red eye flights home. Besides, being what I might humbly describe as one of the school’s most successful and supportive classes, the class of 1968 was also one of the youngest and best looking. In testimony to that, I would like to invite all members and spouses/guests of the class of 1968 to please stand and allow us to give them a big round of applause.

Our class has been graciously recognized on a number of fronts, but one aspect that has been seriously underreported is our contribution to the world of letters. Recently published works include Richard Rainwater’s piece entitled “Minimizing Hair Loss as Your Net Worth Soars.” Then you have Reece Duca’s new thesis, “Market Validation in the Donut Industry.” John Dawson has a new work following up on his smash success, “Egalitarian Traditions at the Choate School.” His new piece is “A Complete Review of the 200 year History of Business Ethics on Wall Street.” Actually this turned out to be a 3-page pamphlet. Shari and Garen Staglin had a recent article published in the Wine Spectator “Water into Wine — Chateaux Desenex to Non-Believers.” Finally, there is the timeless classic by Bill MacDonald, “Lubricants and You.” For those of you who don’t know Bill, he is the CEO of the Houghton Co., the third largest manufacturer of lubricants in South Philadelphia. So … some things few of you knew about the Class of 1968.

While we’re on the subject, I would also recommend the students in attendance tonight read my partner Bill Oberndorf’s classic work published in 1978, the year I hired Bill upon his graduation from Stanford GSB. That was, of course, the timeless piece, “The Fallacy of High Starting Salaries — You Too Can Live on Pennies.” See, I was very penurious then, a fact many of my friends here will vouch for.

I do want to say a few serious words about my experience here in 1966-1968. It was an extraordinary juxtaposition of a very prosperous economy but Vietnam-troubled period of political unrest, combined with a gathering at Stanford GSB of highly motivated young men (and it was 98% men and young, half of the class being right out of their undergraduate schools with an average age of 24). We were brought together to a school literally blossoming under the incredible leadership of Dean Ernie Arbuckle and the very talented faculty he had assembled, the likes of Professors Robichek, Bach, Horngren, and Van Horne. Leadership, one of my real interests and I know one of Dean Joss’ great passions, was visible everywhere from our Dean, our professors and in my supercharged, entrepreneurial classmates. That hardest to teach and highly intangible subject — so key to managerial and organizational success seeped from the very pores of this place. What a time to be here!

There were certain core values that also marked the school:

First, a recognition that free markets allocate goods and services far more effectively then any fiat system, and that if you want to disturb market allocation you better have a very strong policy reason to do so.

Second, a strongly held view highlighted by Sir John Browne in his Arbuckle award speech last year, that meritocracy is the only valid sorting mechanism for recognizing talent.

Third, an uncompromising passion for entrepreneurial endeavor and the clear view that individual achievement and prosperity required no apology when it was born of new economic enterprise that created new jobs and new wealth.

Let me comment briefly on my own career. I like to think of my work and that of my fellow SPO Partners as merchant banking, where partners function as capital allocators. We do this both in our public security market activities and in our private equity deals. What we are attempting to do is to bring capital to managements that merit it in businesses that have outstanding characteristics. What you might ask, are these outstanding characteristics? We would include the following as highly attractive business characteristics:

Real franchises with uniqueness that create high barriers to entry by others Businesses that have significant market shares and pricing power Companies benefiting from a macro trend of long term and sustainable dimensions Businesses that have real cash earnings and distribute same with limited required maintenance capital expenditures Ventures that don’t require financial engineering to be successful, they stand on their own merit

And once you join capital and people to these opportunities, you let talented managers run with the ball and don’t micro manage.

I would also like to say a few words about community and giving back. I would add this as another core value of my 1968 classmates and those who taught us — strong commitment to taking whatever leadership and managerial skills we may have and spending some time employing them toward the public good. My strong passion for helping inner city youth, begun as an undergraduate tutoring 6th graders in Trenton, NJ, has found expression in the Making Waves Foundation I started in partnership with an African American minister in Richmond, CA, in 1989. We now tutor and mentor 325 children, whom we bring in at the outset of the fifth grade and stay with through college. Of our first high school graduation class of 30 students, 28 went to college including two to Stanford, three to Berkeley, three to other UC Schools, two to Morehouse, etc. This is, of course, vastly different from their peer group in Richmond, CA.

Currently we serve Richmond and San Francisco and will open next year in East Palo Alto. We hope eventually to serve 1,000 students throughout the Bay Area and share our model nationally with any interested and responsible parties. Founded in 1989 we made plenty of mistakes, but now feel we have evolved into a highly effective algorithm. Many of my classmates here tonight have joined in similar undertakings, and I would implore you in the room, with your incredible collective talents, to direct them to some degree toward giving back. Live a life that matters.

Finally, for the students here I ask you as you leave this beautiful place, Stanford University in Palo Alto, CA, early in the 21st Century, in this great country to remember why you came here. And I would suggest that was to learn, to lead, and to go forth to unabashedly, but properly pursue your individual prosperity and as a consequence to positively effect the lives of all you touch. I am deeply appreciative for this great honor, that I got the chance to go to the Stanford GSB, and that as many of my friends were able to be here tonight to share this really extraordinary honor.

Thank you very much.

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