Owner’s Manual

The Business Principles that Guide the Decision-Making of the Zayo Management Team

Published January 2014 by Dan Caruso, Chairman and CEO of Zayo Group

In 1983, Warren Buffett drafted a set of business principles; in 1996, he published them in an Owner’s Manual as part of Berkshire Hathaway’s annual report. Every publication of the annual report since has included the Manual.

The content of Buffett’s principles has shaped my business thinking and has been ingrained in the culture and practices of Zayo. Buffett’s decision to publish his Owner’s Manual struck me as an appropriate method to set expectations with existing and prospective investors.

With respect and deference to Buffett, I decided to publish an Owner’s Manual for Zayo Investors. The Owner’s Manual applies to both debt and equity investors, whether private or public.

Principle 1: Treat investors as long-term business partners, and view management as managing partners.

An enterprise must be managed with the perspective that investors, not management, own the assets contained within the company. Management, on behalf of its partners, is the steward of the company’s assets. Management’s responsibility is to act, to the best of its capabilities, to maximize the value of the assets.

Principle 2: Be transparent (i.e., clear, open, and honest) in communications with investors.

Whether the news is good, neutral, or bad, management must provide sufficient information to enable investors to understand the ongoing performance of the business. Information should be provided in a useful, consistent, and unbiased fashion, enabling Investors to gain insight into the results and trends that impact the value of the enterprise.

Management, when sharing information with investors, should focus on the operational metrics management uses when operating the business. By doing so, management is providing insight into its decision-making process as well as the data itself.

Principle 3: Understand the meaning of Intrinsic Value and make maximizing Intrinsic Value the basis for business decisions.

Warren Buffett refers to Intrinsic Value as an all-important concept. He defines it as the discounted value of the cash that can be taken out of a business during its remaining life. Maximizing Intrinsic Value must be the guide for all business decision-making.

I look at Intrinsic Value as the true value of an enterprise, which in turn is captured by the following statement. An enterprise will be worth what its free cash flows, discounted at a risk-free discount rate, are really going to be.

Principle 4: Investors should be informed of the company’s true Intrinsic Value, not more and not less.

Buffett points out that Intrinsic Value is easier to define than to accurately calculate. Management’s goal (to the best of its ability) should be to help investors gain an accurate understanding of the Intrinsic Value.

The goal is to be fair to all investors. To accomplish this, management’s goal must be that the perceived value of the firm aligns with Intrinsic Value.

Principle 5: The principles in the Owner’s Manual also apply to debt holders.

As members of the investor group, debt holders should be treated as partners and in a manner consistent with the entirety of the management principles. Management’s strict responsibility to the debt holders is to comply with the obligations set forth in the debt facilities agreements.

Principle 6: Management’s objective relative to equity holders is to maximize Equity Value Created.

Equity Value is the portion of Intrinsic Value that remains after all debt obligations are satisfied. The maximization of Equity Value is achieved by maximizing Intrinsic Value while using debt to optimize the overall capital structure.

Principle 7: Since maximizing Equity Value Created is a principle, Equity Value Created should be measured and used as a tool in operating the business.

Most executive teams state that maximizing value created is the key financial objective. However, few attempt to measure it and even fewer use it as an operating metric. Using similar techniques, a methodology around Equity Value Created can, and should, be employed in the management of a business.

Principle 8: The communication and management of risk profile requires particular attention of management.

Risk profile permeates its way through many of the principles. Management must recognize the importance of risk profile in its overall relationship with its investor business partners.

Principle 9: Forecasting competency should be viewed as a strategic capability.

Accurate and thorough forecasting can reduce risk profile without adding material cost to a business. Forecasting competency bolsters Intrinsic Value in multiple ways.

Principle 10: A long-term and healthy interrelationship between customers, employees, and investors is essential to maximizing Intrinsic Value.

I fundamentally believe that Intrinsic Value can be maximized only if an entity truly enamors its customers. Equally as fundamental is my belief that the needs of customers and investors can be fully realized only if employees are motivated and inspired to deliver outstanding execution. The key is to find a harmony between investors, customers and employees/management — such that all are better off because of the effective partnership with one another.