Checklist Series, Part 14: Management quality
I hate this entry, because both incredibly obvious and incredibly difficult to do. Everyone says they look for great management, but my excellent leadership team could be your bureaucratic dumpster fire.
Many years ago, I remember interviewing a couple of young portfolio managers who had barely started shaving. Their entire strategy, as they articulated it, centered around buying companies with exceptionally strong management teams. And all I could think was that these two kids, barely out of school, had no business even trying to evaluate corporate management teams.
But really, how much business do any of us have? We as portfolio managers tend to be generalists. Trying to evaluate the management of a company in an industry that I am only a tourist in is akin to trying to trying to make out what you’re seeing inside a dirty frosted window… while not wearing your glasses.
At various times in the past some iconic corporate leaders were criticized by mainstream investment commentary.
Steve Jobs was too focused on design, not enough on profitability and compatibility with Windows. His stubborn belief turned Apple into what it is today.
Jeff Bezos prioritized growth and customer service over profit margins, and in the process built a retail, technological, and logistics powerhouse.
Bob Iger-led Disney has been criticized multiple times for expensive acquisitions (Marvel, Pixar, Lucasfilm), but he was ahead of the curve in identifying the need to own unique content.
Mark Zuckerberg overpaid for the money-losing Instagram app (in retrospect, one of the great corporate acquisitions of all time).
These are just a few off the top of my head. In all of these cases there were very credible and well-argued short cases against each company.
In most cases, I agreed with the common narrative.
In all cases, the narrative was dead wrong.
So how do we evaluate the quality of a company’s management while keeping the necessary humility front and centre?
First, as a CPA, I want to put the numbers first. Don’t just tell me that a management team is strong - show me the money. Let’s see evidence of intelligent capital allocation over time. Flip back to my last two pieces on looking at a company’s financial statements for more on this.
Listen to how management talks. Are they straightforward, clear, and transparent? Do they own their mistakes? Or do they obfuscate and make liberal use of weasel words and phrases?
Listen to what employees say about corporate leadership. I’ve turned down otherwise attractive investments because of things I’ve read on glassdoor.com. Because a strong corporate culture means that the next CEO will likely continue to operate with the same values as the current CEO.
What else do we want to see?
I like a longer tenured senior management team. A lot of turnover can signal brewing troubles, or internal dissension.
Does the company emphasize maintaining strong long-term relationships with all stakeholders (owners, employees, suppliers, customers)? We want management focused on long-term success, not just meeting quarterly earnings numbers. However, I’d also like to see a shareholder-centric approach, which doesn’t neglect the need to deliver value to owners. There are a lot of successful businesses out there that are undoubtedly great businesses, but not necessarily great businesses to own.
As you can see, this is a bit of a messy checklist item. There is a lot to consider, and very few of the items have clear metrics to rank or evaluate. It’s a lot of judgment, and an imperfect science. As I said at the outset, I kind of hate this item. But it’s also critical to investment success, because ultimately, when you invest in a company, you are hiring their management team to execute on your behalf.
There’s an intangible quality to this factor that comes with experience. And too often, leaders say all the right things because they know that’s what investors want to hear. To be honest, if I hear them talking about Buffett and Munger, that’s a bit of a red flag for me. Your bullshit detectors definitely need to be fully operational at all times.
Focus on the business, be transparent, and be excellent. It might just be as simple as that… but as usual in this business, the simple common sense principles are extremely difficult to execute in practice.