In this episode of Be EPIC, Matt is joined by Warren Stephens, the chairman, president, and CEO of Stephens Inc., an independent financial services firm. Warren recounts his career path to leadership and how his father, Jackson T. Stephens, and uncle, Witt Stephens, influenced him throughout his career.
0:00:09.7 Matt Waller: Hi. I'm Matt Waller, Dean of The Sam M. Walton College of Business. Welcome to Be Epic, the podcast where we explore excellence, professionalism, innovation and collegiality and what those values mean in business, education and your life today.
0:00:29.1 Matt Waller: I have with me today Warren Stephens, who is the chairman, president and CEO of Stephens Inc. Warren, thank you so much for taking time to visit with me today.
0:00:43.5 Warren Stephens: I'm happy to do so, Matt, always. Thank you for having me.
0:00:46.6 Matt Waller: Stephens is one of the most prestigious and well-respected firms and certainly in the state of Arkansas. So I wanna delve into that in a number of ways. How that reputation's been developed and why it has. But I wanted to start with a story. There was the story of Tyson purchasing Holly Farms, and there were quite a few firms that wanted to be in that deal. And Don Tyson eventually said, "No, I just want Stephens involved in this deal." And the reason he gave was because he trusted you all. And I know that one of your three values as a firm is relationships, and I also... There's a lot of research that supports that trust is probably the most important variable in business.
0:01:39.5 Warren Stephens: Yeah.
0:01:40.1 Matt Waller: Someone can be very confident, but if you don't trust them you're not gonna wanna do business with them. Trust really is kind of like the primary foundation of business. So how do you build that trust and how do you live out the value of relationships?
0:01:58.8 Warren Stephens: That was really the founders of the firm. So my uncle, Witt Stephens, and my father, Jack Stephens, were very, very focused on relationships, one. And they realized in order to have a relationship you had to have someone's trust. And they just conducted themselves in such a way that, over a period of time, they developed a sterling reputation for trustworthiness. It's not something that just pops up and you get it. You gotta earn it. When we first started, we were a little bitty municipal bond firm, and my uncle took great pride in doing a great job for his clients. And in our business, we have clients that buy securities from us and we have clients that sell securities to our clients. So you gotta strike that balance. And we developed a reputation for fairness and equally representing both sides.
0:02:54.3 Warren Stephens: And then my dad certainly continued that and moved us more into... He joined the firm in 1946, so we started in 1933. My uncle, he moved us more into the corporate finance world doing mergers and acquisitions. We'd always done our own private equity investments, but that also ramped up and has continued to this day, to be a strong aspect of the firm and somewhat unique to... It used to be very unique to our industry to have investment banks. Well, you go back long enough, it wasn't unique 'cause what all investment banks did was making their own private equity investments. But there was a time there where it went away. Now, it's come back. I think the big difference is it's just... We don't manage any outside money doing that. Outside money we manage just for public markets and whatnot. But we did a history of the firm. Right before my uncle died, we finished it, which was fortunate for us. Great timing. And to have him on film and his voice and whatnot. But my dad made it clear that... And this goes hand-in-hand with trustworthiness, but reputation and integrity are paramount to anyone, but particularly in our business. But they're paramount to anyone, to any business.
0:04:10.4 Warren Stephens: And in that oral history, he said, "No matter what happens during the day, you go to bed with your reputation intact. You can look yourself in the mirror and say, 'You did the best you could for whoever it was you were doing it.' And you got a chance the next morning to come back and be successful and continue to build." And that made a huge impression on me and I think we as a firm, and one of the things I'm proudest of is even though we've grown the firm in terms of number of people a substantial amount, that still is there. And there are no gray areas when it comes to being trustworthy and integrity. There's not. This kind of world we're in where everything seems to be a little nuanced... Well, first of all, that's not real. It's not that nuanced. And second of all, it's not, when it comes to integrity and being trustworthy. It's just not.
0:05:02.1 Matt Waller: You mentioned how your father and your uncle, from the beginning, really emphasized the importance of trustworthiness and building relationships. And I know that when you started with the firm in '81, they really took time to mentor you, your father and your uncle. Is that correct?
0:05:23.5 Warren Stephens: Yeah, they did. Particularly my dad, but I'd spent a lot of time with him over the years anyway, but now in a business setting which we really hadn't done. And then I also spent a lot of time with my uncle. He was just such a wealth of knowledge and unbelievably great stories. And when we were talking about relationships, the relationship started between my uncle, who not quite but almost could have been my grandfather in terms of age because the age difference between my uncle and my dad, but he was friends with Don Tyson's father, Big John, the first John Tyson. And then, of course, dad and Don were great friends. And then, over the years, we had helped Tyson grow primarily by acquisitions, and we had done almost all their debt private placements. And JD Simpson, who's thankfully still alive, and he did get COVID and survived, really was the person that worked on all that.
0:06:20.6 Warren Stephens: So when it came time for Don to make, at that time, the biggest acquisition that he had ever done, I can see where he just said, "I don't know those guys from New York." He really didn't know me, but he knew my uncle, and of course he knew my father, and he knew JD very well. So he knew how we would conduct ourselves. And that was a long, hard transaction. It was probably nine months. And there were lots of twists and turns, and you had to have somebody that you could trust and have confidence in. Not that we were right all the time 'cause we're not. But getting to spend time with my uncle in a business setting was great. But I got to spend time with my dad in social settings and business settings, and it was great too. They were really different personalities. Dad was a man of very few words. It's kind like the old EF Hutton had. When EF Hutton talks or speaks, people listen. And that was a true... That was very true of my dad. Now, my uncle Witt was more gregarious personality, but the same... You paid attention to what he said too.
0:07:26.0 Matt Waller: What a great opportunity to be able to learn from your very successful family members, but... So you started with the company in '81. You were mentored heavily. And then by '86, you were made CEO. I think you were around 29?
0:07:46.0 Warren Stephens: I was 29.
0:07:47.3 Matt Waller: And I know you'd been mentored a lot by that point, but did it feel like a heavy weight having all that responsibility that quickly, or was it...
0:07:57.7 Warren Stephens: Absolutely, it was a heavy weight. But honestly, I think they did it... I was too young, but I think they did it 'cause they were both still here. And if I messed up, they could either straighten me up or straighten out the problem. They were the only two shareholders of the firm, so I wasn't gonna stray too far without them knowing exactly what I was doing. The main reason I came back to Stephens was that finance professor at Wake Forest, he asked me where I saw myself in five years after I graduated from business school, and I said, "Well, I probably see myself back at Stephens or working on the corporate finance, investment, banking side." And he said, "Oh, you just ought to go to Stephens." And he said, "You'll learn so much more from your uncle and your dad than you ever will in some analyst training program. It won't even be close." And boy, was he right about that. I guess I got a PhD in finance from my uncle and my dad, really, and the other people at Stephens 'cause they were all very helpful in kinda showing me around and showing me the ropes. At 29, that was too young, I will tell you. Every professional in the firm was older than I was, sometimes by a lot. That's a pretty daunting position for a young man.
0:09:07.5 Matt Waller: I would think so. But I can also see your point. By having the big picture and working from the big picture, the C-level, your father and your uncle were able to mentor you in a way that really honed your leadership skills and your strategic thinking and those kinds of things which are hard to develop in a lot of entry level positions.
0:09:31.5 Warren Stephens: And they're also, and we are too now currently, but we're all very focused on succession. Most family businesses fail for a lack of having a successor for the founder, and the founder hangs on too long or whatever else. Dad in particular really didn't want that to happen. So again, I think he did things a little faster than he might otherwise have done, or even though I felt like I was too young. And I told him that. I also know my dad well enough that he wouldn't have put me in that position if he didn't think I could be successful with it. He wasn't trying to set me up for failure. He thought I could do it.
0:10:04.9 Matt Waller: Warren, your company has grown a lot since you became CEO, and you've restructured and entered into new businesses and so forth. And I know that, like you said, your private equity arm is doing really well, your investment banking arm is doing well, you have a strong wealth management group.
0:10:26.0 Warren Stephens: Yup.
0:10:26.8 Matt Waller: And so your successor, as you're developing the family to be able to... Or whoever is going to be involved in running the company, do you try to get them visibility and experience in a multitude of areas, or how do you go about doing that?
0:10:42.5 Warren Stephens: I do. We have three children. They're all gonna... They're all involved in the business. They're all gonna do it. They wanna do it. They enjoy it and they like it. They have just found their own way to finding different experiences within the firm in some slightly different, or in some cases, really different areas. And I think that's good. I really didn't have any experience other than Corporate Finance. I didn't know anything about money management, I didn't know anything about any of that. Now, I've come to learn a lot. But both Miles and John worked for big institutional money management groups, one that's in-house at Stephens, and one that's not before coming back here and doing investment banking. And now Miles, of course, is running the insurance department. We're such a bigger, more diversified firm these days, it's easier to do that. When I joined the firm, I think I was about employee number 125 or something, and now we've got right around 1400. So it's a different firm with a lot more capabilities and a great depth of people.
0:11:45.3 Matt Waller: Warren, I remember you telling this story once to me about how you took the crisis '08, '09, the so-called Great Recession, and people were fearful because investment banks were shutting down. I remember it so clearly. We actually had an executive MBA program in China, and our finance professor, one of our finance professors was flying over to teach a finance class the day that Bear Stearns closed. And by the time he landed and was reading all the news, he's like, "I don't know what to talk about, other than this crisis." I think this story also points back to the trust factor of your firm. All these investment banks were closing or laying lots of people off, or just having lots of trouble, but you really wound up using it to build the firm in many different dimensions. Would you mind speaking to that?
0:12:45.5 Warren Stephens: Well, yeah. We'd been growing the firm for a while but just to put it in perspective, '08, '09 hits, we have about 60 professional investment bankers on the corporate finance side, very small private client. And in '08 and '09, I was early 50s, and I wanted to grow the firm bigger, but it's just a question of people, and then how much are those people gonna cost you. And at great times, they're expensive, but in bad times, they're not as expensive. And they really don't care about the money, they're just looking for a place that is stable that they can go to work for and practice their craft and not worry that the firm's gonna go out of business the next week or the next day or whatever, and of course, we've always run the balance sheet of the investment bank so conservative. That's another goal of my uncle and my dad when I would ask him is, "We wanna be in business the next day," which I thought was kinda silly. But now having lived through '87 and '90, the early '90s and the dot-com bust, and then The Great Recession, it is not silly. It is a damn worthy goal.
0:13:58.0 Matt Waller: You've told me that before that your father or uncle had that quote, "We need to be in business for the next day."
0:14:05.0 Warren Stephens: Yeah. And one time I asked dad, I was thinking about, "Maybe we ought to try something or do something else," and we'd sold something, we had a lot of capital available. And he turned me down, I can't even remember what it was, obviously, it deserved to be turned down. And I said something to him that sounded like... It's gonna sound pretty bad, but it's something a young person might say to their father or even their boss. I said, "Well, Dad, what are we gonna do with all that capital?" And he sat there for a minute and he looked over at me and got a little wry smile on his face, he said, "Keep it." [laughter]
0:14:37.5 Warren Stephens: And I thought, "Okay, yeah." I said, "Okay, we'll do that, we'll keep it." So '08, '09 comes around and we're not going out of business. Other people are, a lot of good people are gonna be out on the street looking for a home. And I remember in our management meeting I told the whole group, I said, "We are gonna use this as an opportunity to get people, good quality people, that we haven't been able to get in our normal growth." And it happened. From 60 investment bankers in '09, we have north of 200 in corporate finance. Now, we have about 120, 125 private client brokers. Now, not all of them came in '08 and '09, but a lot of them did, you could just go on down the list. But it also points out, and I've said this since they first started becoming public entities, I don't think investment banks make very good public companies.
0:15:36.5 Warren Stephens: And if we'd have been a public company in '08 or '09, there is no way we could have done what we did in terms of growing the business. Nobody, with public shareholders, public board, nobody would have done that. But because again, we got this very long-term view, particularly in the American business world, we're thinking about generations, we could afford to do that. And you can do it when you don't care what's your next quarter or even your next year's earnings are gonna look like. Because when you do that, you incur a lot of expense. It's gonna destroy your income statement for some period of time. But now, you can look back some... What are we, 12, 13 years after the fact and go, "It was worth it and it was absolutely the right thing to do." So really, in terms of strategy for Stephens, that's one of our best moves, was to take that opportunity in '08 and '09 when it looked like the world was coming to an end. We weren't sure, it was pretty grim looking, but we weren't going out of business.
0:16:45.2 Warren Stephens: And I remember saying to our employees somewhat in a memo, I think that, "Look, balance sheet's fine, we're under no illusion that anybody from Washington is gonna ride to the rescue of little old Stephens Inc. We gotta make sure we survive and we're gonna come through this." I think in a way, it gave people a lot of confidence that we're gonna be fine. I'm not gonna... You might lose your job but you're not gonna lose it because we downsized. In all my career at Stephens, and I know my dad and uncle, we've sold parts of our business so we've laid people off 'cause they were no longer needed because we didn't do that business anymore but just to downsize because of market conditions, nah, we don't believe in that. I thought I'd seen everything, then you get a pandemic thrown into the mix. I'm still trying to figure out how to navigate that thing. I know how to navigate a financial crisis pretty good, but a pandemic, different animal.
0:17:39.6 Matt Waller: So I'm gonna switch gears a little bit here, Warren. You are a big proponent of capitalism. I remember you wrote an article for the Wall Street Journal op-ed section a while back, and I recall that it had to do with the fact that a lot of people, young people today in particular, don't really understand what's meant by capitalism. They tend to think of what we call "crony capitalism" as being capitalism.
0:18:08.1 Warren Stephens: Right. Well, a lot of which came out of '08 and '09 because they saw all the bail-outs.
0:18:13.6 Matt Waller: Yeah, but you wonder how do terms get turned upside down like this? Because it has in the colloquial sense, very different meaning now, it seems like. There's a book by Russ Roberts that I really like, called The Invisible Heart, and it's a play on words from Adam Smith's The Invisible Hand, 'cause Adam Smith talked about the efficiency of free markets and this book by Russ Roberts talks about the fairness. It's a novel, but it really does a good job of getting across the idea. But you were kind enough to invite me to some of your CEO summits that you used to have and there were tremendous thinkers. I remember... Well, let me show you something here. I don't know if you can see that. It's a napkin with a drawing on it.
0:19:12.0 Warren Stephens: Yeah, Art Laffer, yeah.
0:19:13.8 Matt Waller: So when I was younger, before the World Wide Web, when I would get the Wall Street Journal, I'd turn to the last page of the first section of op-ed pieces, and I always wanted to see if Art Laffer had written anything. If he had, I read it, if he didn't, I'd go back to the first page. That's how much I enjoyed him. But I remembered a story once, I believe it was... He explained this concept of the Laffer Curve to Ronald Reagan when Ronald was at a very early stage, I don't remember. I don't think he was president yet, but I could be wrong.
0:19:49.0 Warren Stephens: He might have been governor of California.
0:19:51.2 Matt Waller: Yeah, that's right. But you had people like him speaking... But I was at this luncheon that you had put on as part of the conference, but Art Laffer was speaking and I thought, "I can't believe I'm fortunate enough to be here with all these people." And after the lunch, everyone walked away, but not me. [chuckle] I picked up my napkin, and I started walking towards him. And no one else was around him, and he said, "I know what you want." And so, those of you listening, you couldn't see what I did, but I have a napkin that I had framed, and Art Laffer drew the Laffer curve and he wrote a little note on it. But he's such an upbeat, positive person.
0:20:39.5 Warren Stephens: He is. And in most ways, I will tell you, I think people who are capitalists are optimistic. A lot of people today, they take things for granted. They don't understand what it takes to have simple things that we take for granted, like a huge array of food in your grocery store and drinks of all shapes, of all kinds, you know, energy drinks and just bottled water, and well, all of that is driven by the capitalist system and a supply and demand curve. There's hundreds of people that work every day to give people all these options, and increasingly they're healthy options and choices. I always think of the evolution of Northwest Arkansas in my lifetime as one of the great examples of capitalism. The first time I ever went to Fayetteville was in 1969 for the Arkansas-Texas, the big shootout, which I'm not over yet, and I guess I'll never get over since I'm 64 now. But it was pretty bleak. The university was not much. My God, the football stadium wasn't much bigger than Quigley Stadium where the Central High plays. What became Barnhill Arena was Barnhill Fieldhouse, but you could barely get a television signal.
0:22:00.4 Warren Stephens: Fast-forward to today, and Northwest Arkansas is one of the most desirable places to live in in the country, and indeed maybe even in the world. And it's been driven by the growth started with Walmart, for sure, they're still a big driver, but Tyson and JB Hunt, which also spilled over to the University of Arkansas, and the amount of wealth that was generated that people then gave to support churches and causes and whatever they wanted to do, so it transformed Northwest Arkansas in a fast period of time. Really, I mean, 50 years is nothing to go from a hardscrabble, poor, mountainous area to what it is today. But at the same time, the eastern part of the state, which had seen massive transfer payments over the same 50 year period, has continued to deteriorate to the point that a lot of us shake our heads, scratch our heads and say, "What is the solution there?"
0:23:07.4 Warren Stephens: And I don't think anybody's really got one. And it's probably never gonna be like Northwest Arkansas, but you're seeing a little bit of that in Northeast Arkansas. You've got some very successful companies here in Central Arkansas, and the Walmarts and the Tysons and the Hunts come... They don't come along very often. Now, to have all three of them headquartered in such a small area of such a small state is extremely rare. I can't think of a situation where that happened ever. It's a wonderful thing to see, and it's... We admire all the great success of all those companies and indeed the area. Heck, we're proud of it.
0:23:48.3 Matt Waller: And I know you all have been a part of it. You were engaged in the IPO for Walmart and JB Hunt.
0:23:55.6 Warren Stephens: We were indeed. I actually used the Walmart IPO to talk to my regulators about how they've basically destroyed the ability of such small companies to access the public market because Walmart raised less than $5 million in 1970, and they had about $32 or $33 million in sales. And you couldn't do that today for a company that was 10 times bigger than that which is a shame because Walmart and Tyson and Hunt, not only have they had enormous success, but they've generated enormous amounts of wealth for their shareholders. But I know very, very successful families, say from Eastern Arkansas, who are farmers but they bought Walmart in the '70s, even in the '80s, and kept it. And that's the reason they're such successful farming families, really, is they got other businesses.
0:24:49.6 Matt Waller: The first time I met you, you took me to your father's office, which is still in the building. And I remember seeing on the bookshelf the Walmart Prospectus from their IPO.
0:25:04.1 Warren Stephens: Yeah.
0:25:04.5 Matt Waller: I think '71, I believe.
0:25:07.1 Warren Stephens: '70, I think. But anyway, it could be '71.
0:25:09.4 Matt Waller: And it was so small.
0:25:12.4 Warren Stephens: 26 pages. [laughter]
0:25:15.8 Matt Waller: So things have changed a lot in terms of... I don't know what the size... How much of the size today is driven by regulations and laws, but I would imagine it's a lot.
0:25:26.8 Warren Stephens: Oh, it's 100% driven by regulation. I've read the Walmart IPO, 26 pages. Who couldn't... I'd read that in 30 minutes, maybe a little longer. But everything I needed to know about Walmart was in those pages. There weren't one thing left out that I needed to make an informed decision about. And today it'd be hundreds, if not even a thousand, pages, and nobody's gonna read that. So I don't know what we were trying to achieve in the regulatory world, but it's like we achieved the opposite.
0:25:57.3 Matt Waller: Indeed. So what would you say to young people who might be listening to this about capitalism? And obviously, there's been a lot of marketing that has degradated the term, but how would you encourage them to look into this further? Or would you?
0:26:16.9 Warren Stephens: Well, I definitely would. First of all, I think you need to understand... Young people need to understand the difference between state-run economies and free market economies, which is, of course, what capitalism is, with appropriate guard rails and regulations. And I'm not at all saying we shouldn't have those, 'cause I think we should and we do, but the state controlling the allocation of capital and resources versus individuals and private organizations, there's just no comparison as to what system benefits its citizens better. There doesn't seem to be much of a focus on the lack of just material goods in places like Venezuela and Cuba, which are very state controlled, but they're very real. And I say all the time, when I was growing up, we had the Soviet Union and the Eastern European communist countries. And the difference between the Eastern European countries and the Western countries was so stark. I went from West Berlin into East Berlin. The difference was night and day. And the poor people of North Korea just keep suffering and starving. That's a little bit different. They got a crazy person running the show, but the Chinese have done an interesting thing in introducing a lot of capitalist theories and principles into their economy, but it doesn't... The freedoms don't apply to the citizens, and ultimately that's gonna come back and really hurt them.
0:27:52.8 Warren Stephens: Now, ultimately, it could be a heck of a long time, but it's the same thing that happened to the Soviet Union. In those countries just... Once people get a taste of personal freedom, they don't wanna live under anything else. And capitalism has provided so many wonderful things that make everybody's lives so much better and easier. So to young people, I'll just say, I want you to start with the premises, you're gonna choose the system that allows the most individual freedom. That's the system you're gonna wanna exist in, 'cause it's the one they already exist in, they just take it for granted. You're gonna wind up with capitalism and free markets every time. I sure don't want people telling me what to do or where to go or what I can do and what I can't do. One day I was at the golf course with my oldest son, Miles, and we made a turn and he got one of those crustables, those peanut butter and jelly sandwiches that are in packages.
0:28:51.3 Warren Stephens: We got over on the 10th tee and he'd eaten about half of it, and he looked at it and he said, "This may be the best example of capitalism I've ever seen. Can you imagine a state-run economy thinking we need to have individually packaged strawberry and grape peanut butter and jelly sandwiches and it would be a hit?" And I went, "No, and that's a really good point." So it's a little thing like that to huge things like... Everybody lives on their phone. Your phone is your computer now. It does everything. The mobile phone started as just a phone, and it was the size of a pretty large shoe. It cost a lot of money. And now it fits in your pocket and hell, I haven't quite figured out how to work it all, but it's on your wrist. They say I can talk on that. I haven't figured out how to do that, but I'm gonna figure that out, 'cause I used to read Dick Tracy when I was a kid, and that's what he did. You gotta understand the relative value of the two systems, and I've never seen a state-run economy perform well for an extended period of time, ever. And people say, "Oh, well, look at Sweden." And so I did. I looked at Sweden, and they have an extremely generous welfare state, but they're a capitalist...
0:30:00.6 Matt Waller: Yeah, it's true.
0:30:01.1 Warren Stephens: System. They actually went too far to the state control of everything, and they had to bring it back and say, "No, this isn't working out too good." And I mentioned Northwest Arkansas, but we're one of the great beneficiaries, too. Our family... My uncle had a sixth or an eighth grade education. My dad was the first one to go to school. To think they could achieve what they achieved with limited financial resources is just remarkable. And the fact is, in any other system in the world, my uncle would never have been given a chance, but in this country, you get a chance. You get a chance to do what it is you wanna do, and if you can provide goods and services that people are willing to pay for, you're gonna do really well. That doesn't mean you're gonna... Everybody's gonna become Sam Walton, but you can do really well. And one thing I wanna say about Sam Walton, and my dad said this to me about it back when, for a while he was the wealthiest man in the United States. And my dad looked at me and he said, "You know, Sam didn't care a bit about being the wealthiest man in the United States, and that wasn't his goal, but his goal was to be the best retailer he could possibly be. And he has never given up on that." He did pretty well. He knew what he was doing.
0:31:20.9 Warren Stephens: And they still do. They started doing a lot better vis a vis the Internet competition with Amazon. But I used to tell people all the time that Amazon's great. We order stuff from Amazon all the time, but Walmart's got every asset that Amazon's out there building. Somebody said to me, he said, "Golly, Amazon's building a million square foot distribution center down in the Dallas-Fort Worth area." And they said, "You ever heard anything like that?" I said, "Yeah. Walmart's had that since the '70s. What are you talking about?" They're figuring it out. They work hard and they know they're in a tough fight, but that's capitalism, right? Walmart changed the landscape of retail. Amazon's changing the landscape of retail. You need to get with the program or you lose.
0:32:08.4 Matt Waller: Competition drives improvement. There's no question.
0:32:10.9 Warren Stephens: Exactly. Exactly. Competition drives improvement.
0:32:15.4 Matt Waller: Well, Warren, this has been delightful. So thank you so much. I appreciate it.
0:32:20.7 Warren Stephens: My pleasure, Matt. Come see us.
0:32:23.5 Matt Waller: Thanks for listening to today's episode of the Be Epic podcast from the Walton College. You can find us on Google, SoundCloud, iTunes, or look for us wherever you find your podcasts. Be sure to subscribe and rate us. You can find current and past episodes by searching Be Epic podcast, one word, that's B-E E-P-I-C podcast. And now, be epic.