CEO Stories: Family Lessons From the Farm to Finance

This Is Capitalism: Warren Stephens

RH: This is Capitalism. I’m Ray Hoffman. Arkansas occupies about the same amount of space on this earth as Florida but with only one-sixth the number of residents–about three million. And yet in recent decades, Arkansas has produced a disproportionate number of major influential companies, like Walmart and the investment banking firm that has provided the capital and guidance which has enabled Walmart and so many other firms to grow and prosper, Stephens, Incorporated. It’s a family-owned business, led since 1986 by Warren Stephens. And that’s where we started the conversation, with the family.

Bentonville, Arkansas we all know about, thanks to Sam Walton. But Prattsville, Arkansas, the highway sign says “population 282.”
WS: That’s an exaggeration. [Laughter.]

RH: Okay, not 282. It strikes me as another place of great importance of the history of Arkansas, being the home of your family. So I’m wondering what was the water or maybe more accurately what was in the soil that so nurtured the Stephens family story?
WS: Well my father’s family did farm. I mean they literally grew up picking cotton, he and his brothers and sisters. They were extremely close. And I don’t know if there’s anything you can point to specifically in the water or something that was unique to Arkansas but there is something to that. I mean it’s not just Sam Walton, it’s Charles Murphy at Murphy Oil and Bill Dillard at Dillard Department stores and JB Hunt and the Tyson family.

And I’ve talked about it a little bit with Matt Waller, who is the dean of the Walton Business School at the University of Arkansas and he agrees that there is something else in Arkansas. And maybe…he speculates, I mean no one really knows for sure, but he speculates that it’s just a toughness. We can do this. We can make our lives better and we’re going to do it. And I’d have to say–and there are more stories than the ones I just mentioned–it’s pretty remarkable to think that my uncle and dad and their siblings came from such a meager background and where we are today as a family and a firm.

RH: How large was the farm?
WS: The farm was my grandfather’s, Albert Stephens’, of course I didn’t call him that, he died when I was pretty young. And what I was always told was that the family had lived off of selling pieces of the land and never really made a living out of farming until there wasn’t much land left to sell and they had to farm it. So I don’t really know the size but it was pretty darn small.

But I know my uncle made it one of his missions in life was to piece back together all of the land that had originally been in the family. And so today it’s owned by my cousins. The farm there is I think around 3,000 acres. It wasn’t when they were growing up, it was much, much smaller than that.

RH: Was it your grandfather that suggested to your Uncle Witt that he go into the belt buckle business?
WS: I don’t know about that. I don’t know how my Uncle Witt got into the belt buckle and bible-selling business but he was really good at it and…But I know my grandfather was the one who advised him to take a look at going into the bond business because Arkansas was in default on its bonds and they were trading at 10 cents on the dollar and he was convinced that the state of Arkansas would figure out a way to make good on those bonds and so that’s what my uncle did.

RH: So this is 1933, the depths of the Depression.
WS: Absolute depths of the Depression, that’s right.

RH: And how much did he buy? Did he buy up everything he could find?
WS: He got a bank loan. The numbers have changed a little bit over the years, we’re not really sure exactly how much but somewhere in the neighborhood of $15,000 or $25,000 loan. And yes, he started buying bonds as cheaply as 10 cents on the dollar. He sold them to customers but he also kept some for himself and by 1940 they were trading at par. So that was a great return for him and for his clients.

RH: I think it was Sir John Templeton who said buy when there’s blood running in the streets.
WS: Yeah, well there was blood running in the streets in 1933 not only in Arkansas but certainly throughout the country. It was in terrible shape.

RH: Now I have to assume in the 1930s there were parts of Arkansas out in the country that didn’t have electricity. So how important was it in the development of the state for Witt Stephens, and then your father, Jack, to build not only a municipal bond business but to invest in energy, particularly natural gas, and other businesses all around the state? Can I tie that together in the history and the development of Arkansas in a big way?
WS: My uncle always gave a lot of credit to one of FDR’s programs, the Rural Electrification Program, which was designed to bring electricity to the poor parts of the country. It was really focused on Appalachia but it also benefited places like Arkansas. And I know [laughter] my uncle bought the telephone exchange in Sheridan, Arkansas, which is the county seat for Grant County where Prattsville is, because they wouldn’t run a phone line out to his parents’ house, it just didn’t make any sense.

So he bought the telephone exchange and ran a phone line out there so he could call his parents. Later he sold that telephone exchange to the Wilburn family. Well, the Wilburn family is who started Alltel, Allied Telephone, Alltel, and of course they did go and build enormous amounts of telephone lines, landlines we’d call them now–kind of an archaic term.

But that was how a lot of telephone service came to Arkansas was through the Wilburns and their initial purchase of the Sheridan Telephone Exchange so my uncle didn’t have to… he didn’t really want to own the telephone exchange, he just wanted to have a phone to his parents’ house.

RH: Now take me inside the Stephens’ office when you began to go in to visit your dad.
WS: Oh, I think probably I spent a couple of summers there hanging around the trading desks when I was in college. So that would have been in the late ‘70s, probably ‘77, ‘78. But then of course after I got my MBA, I came to work full time in 1981. He and my uncle owned the company so I had a pretty clear line of who the shareholders were and where they were and they weren’t sitting too far away from me.

So I used to pick their brain a lot about what were the philosophies that they operated the company on and how they had been successful and gotten to the point that we were.

And they said some pretty basic things that I have kept in mind. One of them my dad said was, when I’d ask him what were some of your goals, he said “well I wanted to be in business the next day.” And I thought to myself that that was kind of a silly goal, you know? These guys are successful, they have made a lot of money. Well now, 35 years later, that’s not such a silly goal because I have witnessed throughout my career all kinds of investment firms just disappearing, gone.

My dad also said “you can’t ever take a risk that if you lose it all that you endanger the ability of the firm to survive.” Those are great lessons. They were great lessons for me, they are great lessons frankly for people today. And I think in our latest financial crisis of ’08 and ’09, I think a lot of people forgot that. Everything can go wrong at one time and when it does in our business, it’s ugly. You better have liquidity and you better have your balance shape in great shape.

RH: There was a quote about you in The Wall Street Journal suggesting “I’m a fraidy-cat banker and proud to be.”
WS: That was, yeah, that was a quote in the Journal. I’m a fraidy cat banker. And it was also talking about balance sheets because you don’t really know. It was worse than anybody expected.

RH: Let’s go back to the 1960s. It seems that’s about the time that Stephens began its move beyond municipal bonds and it seems to coincide very well with the rise of Sam Walton’s business.
WS: Up in Bentonville.

RH: Up in Bentonville.
WS: Yeah. We were investing on our private equity side in companies at the time, started a company called Systematics in 1968 that was a bank data processing company. And then we had an insurance company at the time, a life insurance company. And we were loaning money to Sam Walton to build his first stores out of the insurance company. Dad and Sam became friends and then in 1970 we were a co-manager with the firm called White Weld, which was soon after that bought by Merrill Lynch and did their IPO in 1970.

A lot of things have happened that are very fortuitous in Stephens’ history but being around for the Walmart IPO and the credibility it gave us pretty instantaneously in the corporate finance world–which we were new to–is one of the best things that ever happened to us. People can’t believe they raised $4.5 million. Well they only had $33 million in sales in the 1970s. And I also show this to our regulators whenever I can–the prospectus was 25 pages long. And I said “look at that, everything in there you needed to know.” If you’d a just had the wherewithal to have bought a couple hundred shares or a couple a thousand shares of that IPO and kept them, your life would be a lot different.

RH: And then you were involved in any offering that they did from that point on, right?
WS: Yeah absolutely. We were a co-book runner on every equity-related transaction they did until they quit doing equity, which was probably about the mid-‘80s, when they just didn’t need to issue any more equity. They could finance everything in the debt markets and even in the commercial paper markets.

RH: Given the very visible results of what Stephens Investments and Stephens Capital have produced, especially for a state that only has three million people and no access to a port, why should capitalism be so misunderstood by so many?
WS: That is an interesting question. I don’t know. It’s got to have some roots in this last crisis that people really had their foundation shaken. People wondered if they capitalist system is really the right system. But I don’t think they truly understand capitalism.

I mean, I think there has been a disconnect with the average person walking into the grocery store and buying exactly what they want or going into a clothing store and buying exactly what they want and they don’t understand everything that went into getting that product right there for them to buy and that it was done all the way through– it was done by several different layers who all were interested in making a profit for themselves. Top-down dictates from a government just cannot provide the goods and services that consumers want. And the consumers vote everyday with their wallets.

But somehow there has just been a disconnect in that capitalism is the system that does that. And particularly with the young people today, which is so bizarre to me because they live on their phones, they live on the apps on their phones. Well, all of those are done by people who are interested in making money off those apps. The cell phone today is a product of the invention and the ingenuity that is prevalent in the capitalist system. It is not prevalent in any other system.

RH: It couldn’t be created by command.
WS: Right.

RH: Human nature. We have an interesting disconnect. As you pointed out in The Wall Street Journal op-ed piece just a few days ago, we have young people rejecting capitalism and free markets based on one recent survey especially but they celebrate entrepreneurs and free enterprise.

WS: Right, is that not…. I mean that’s what I said. I don’t think they understand what capitalism is. Because when they say “oh we love entrepreneurs and free enterprise,” okay, well then you love capitalism. That is exactly what it is. But somehow there has been a disconnect with that.

But the embracing socialism is also…I just don’t think they understand what socialism is. They haven’t seen Eastern Europe collapse under the Socialist, Communist system like it did in the late ‘80s and early ‘90s. You know that it can’t work. And for some reason they are not paying attention to what’s going on in Venezuela.

RH: There’s your case study.
WS: Right. But at the same time, if you go to China, Vietnam, developing countries in Asia that are quote “communist,” yeah they’re communist but they got a lot of market- based elements to their economy and they are not going back. They can’t go back. I mean you’ll start depriving people of the goods and services that they have come to grow accustomed to.

RH: So how do we turn this around?  How do we break this disconnect?
WS: I wish I had a magic wand. I think a lot of it’s going to depend on education, educating young people, explaining to them what capitalism is. We are trying to do that a little bit with our This is Capitalism series, where we portray successful entrepreneurs, capitalists that have gone before us or that may even currently be with us and show the impact that they have had on their communities and their employees and just what they’ve done.

I mean the Walton family is just a terrific example of not only the impact on stockholders–but just the area of northwest Arkansas when I was young and growing up was a backwater. I mean it was the hill country and it was poor and today Northwest Arkansas is one of the most vibrant areas in the country, it’s got great air service, much better air service than Little Rock has, because everybody wants to come see not only Walmart but Tyson and JB Hunt and University of Arkansas. The Waltons have given generously to the university. Alice Walton has built this incredible art museum.

So it’s not just the financial rewards for the shareholders. I wish I could take people back and show them what northwest Arkansas looked like in the ‘60s and show them what it’s like today. And it’s because of the success of the capitalist system that allowed Walmart and Tyson and Hunt and others–I’m sure I’m leaving some out–to do well.

RH: And all those other Arkansas companies, Axiom and Alltel and so forth, yeah. To quote the homepage from the Stephens’ This Is Capitalism website, extraordinary people emblematic of the entrepreneurial spirit. Warren Stephens fits well in that group.

This is Capitalism and I’m Ray Hoffman.