Measuring Managers' Mettle: A Revealing Investment Gauge
A critical part of the investment appraisal and company evaluation process is gauging management effectiveness, quality, character and values. Surprisingly, this essential aspect is often disregarded by Wall Street, unconcerned with character differences among the companies it covers.
In crucial moments when events panic investors and a stock nose dives, executives are usually temporarily incommunicado. The ultimate basis of a judgment call in those circumstances is whether management can be trusted.
It also holds true over the long term. Who would you rather invest in, trustworthy or cagey executives? You need to get a handle on executive values in companies where you have an investment.
There are a number of recurring styles and molds—some are constructive and others are detrimental. Many times executives are not lying; they are just uninformed, naïve, or overly optimistic. They can be eternal lowballers, always in a hype mode, taciturn, or shrewd storytellers.
Investors need to identify good executive traits and undesirable ones. Executives make common mistakes when problems surface, repeated every so often by different companies over the decades. You need to be aware of these blunders as they occur; they probably mean the future will only get worse for a while.
Individual investors do not have the access to executives that is available to many Wall Street insiders. Just about the only way to get firsthand exposure to management is by listening in on quarterly conference calls.
You can hear the executives’ prepared remarks and their answers to questions live by webcast or telephone. These calls are scheduled a week or two in advance of earnings results and are publicly announced in a company press release.
If you need more details, such as telephone access numbers, call investor relations at the company. A replay is normally available for another week or so after the call. The sessions are available to anyone on a listen-only mode, but only Wall Street analysts and institutional investors can ask the executives direct questions.
A conference call is worth a thousand reports. This is where you will obtain some feel for the company’s management style and character.
It’s like observing a press conference. Judge the level of confidence and conviction, arrogance or humbleness, candor, conservativeness, and other characteristics.
Take note of the executives’ tempers. Sometimes they sound hesitant or unconvincing. You will get some help in drawing out the management from the questions presented by analysts who often act like piranhas. Important and revealing elements can be uncovered.
Beyond just observing management traits, these calls are exceedingly valuable to gain insight on a company’s business, current trends and outlook. They are more useful than research reports to discover countervailing analysts’ attitudes, and key Wall Street concerns and uncertainties.
Read between the lines to determine the real message. And pay attention to other more subtle aspects of these calls. You can glean as much from the nuances as from the actual remarks.
Take note of the executive commentary for tone, length and other elements. Prepared remarks can drone on for 45 minutes, leaving only a brief 15-minute segment for Q&A. That may indicate a cover-up to dodge penetrating questions and cross examination.
Get an overall impression. Is the picture clear and favorable, or clouded and uncertain? These calls provide the closest look you’ll ever get at a company.
There is an array of traits to look for that are good indicators of management quality. Several reassuring executive characteristics suggest that a company is likely to have promising investment merit, key to any evaluation.
Here are some management attributes that I seek when reviewing investment candidates.
Charisma, Leadership, Courage
Good leaders have a certain charisma that inspires employees and instills confidence in clients. Such executives are effective in moving companies ahead by their power of persuasion. I am impressed when employees have great respect and love for their leader. These executives must have the guts to do the right thing despite criticism, aggravation, and short-term stock impact.
Empowering Other Executives
Effective leaders attract, encourage and empower other members of management. Less secure, power-hungry tyrants do not. Bill Gates at Microsoft trusts Steve Ballmer, and Larry Ellison at Oracle relied on Jeff Henley. The best leaders tolerate independence and strength among executives on their team.
Executives gain credibility by being forthright, freely discussing negative cross currents and challenges. Access is critical, management must be open, available and responsive to Wall Street and investors.
Company leaders should not be arrogant, no attitude or egos, minimal hype, and modest PR baloney. Firms in the Midwest, for example, seem to be more genuine. Executives should willingly admit mistakes and be willing to alter the course.
Trust, Quality, Class
Management must be honorable, their comments reliable, their actions straightforward. They should act with class, not be litigious, display no vindictiveness, do nothing shady or sleazy.
Hands On, In Touch
Executives should be aware of what’s occurring within the company at several levels and be in contact with the little people, not buffered by multiple management levels. Ross Perot was a master at this, chatting with his lowest-level associates in the elevator and in the cafeteria.
Outgoing, Aggressive, Confident
I like to see these elements, and yes they can co-exist with humility. Executives should not be shy, inward or parochial. There needs to be a certain toughness, assertiveness and conviction as long as there is the realization of vulnerability.
Creative, New Ideas
Leaders should be imaginative, with frequent new strategies, directions and methods. They need to be flexible, resourceful, inventive and unafraid to make changes. Transformation is invigorating, enhancing competitiveness.
Old-Fashioned Business Values
Management should be long-term oriented, use no temporal acts to boost immediate earnings, have a certain discipline and avoid overpaying for acquisitions. They shouldn’t have sumptuous headquarters or ostentatious perks. They should care about low-level employees and small clients.
Experience, Broad Backgrounds
Executives should have experience in a variety of disciplines such as manufacturing or operations, and backgrounds in other companies and market sectors. Too many executives have only sales or financial career paths.
Executives shouldn’t mix business with social styling and other over-the-top dress practice. I am bothered by flashy manners, extravagant events or meetings and anything that substitutes superficial showmanship for substance.
Certain undesirable conduct raises red flags and puts me on alert. Such demeanor is detrimental and usually indicates a problematic outlook for the company. Investors should be turned off by executives who display this type of comportment.
Dictator Surrounded by Yes-Men
CEOs or chairmen who are tyrannical dictators, sticking their noses in every detail, encircled by weak, wimpy yes-men are likely to hit a brick wall. They can’t be perfect, know everything and always make correct decisions. They chase away real talent and effective leaders. The company outgrows them. Overly domineering autocrats create a vacuum in the management ranks.
Doing Too Much, Lacking Focus
Leaders should not be too diffused, travel too heavily or make too many speeches or appearances. They can’t work effectively on the road. Talk and rah-rah boosterism with employees and clients can ring hollow; often it’s a substitute for the hard work of running the company. Executives need to concentrate and accomplish resolution on one or two big aspects, not try to do scores of tasks.
New Age Commune, Love In
These are youthful founders and executives excessively exuberant, spiritual, reveling in community, treating business as a glorified love-in, common in the ’90s Internet Bubble Era. They refer to each other in cutesy terms: Bobby, Billy, Johnny. The environment may be creative, but the atmosphere is like recess, just playing at business—not a sound situation.
Hubris, Ego, Overconfidence
Executives should not be full of themselves. Too much of an attitude is a set-up for a fall. Ego is blinding. A superior peacock posture engenders hazardous behavior like overlooking competition or not listening to clients. Surprise setbacks are sure to follow.
Hype, Marketing, All Show
I am cautious when I see executives prominently featured in their own company advertising campaigns. Full-page ads and splashy airport billboards bother me. Carly Fiorina featured herself in Hewlett-Packard ads and was later dismissed by the board. Beware of over-the-top hype and executive-centered publicity.
Lavish Digs, Perks, Packages
Read the proxy statement and annual report footnotes to note excessive executive pay packages and incentives. Stock appreciation rights, prodigious options, and $100 million paydays are a warning. The same for the fleet of corporate aircraft, ski lodges and opulent headquarters.
Stock Price Fixation
Displaying the daily stock price at the corporate entrance check-in desk, employee cafeteria and at analyst meetings connotes a short-term executive mindset. Management discussion of stock valuations is repulsive. They are managing the stock price instead of the company.
Private Life Demeanor, Reputation
I am put off by executives with a litany of ex-wives, messy public divorces, marriages to bimbos, active outside investment pursuits like real estate or private businesses, ostentatious McMansions and parties, sports cars and profuse jet-setting. These executives are not attentive enough to their business.
Designer Suits, Flamboyant Attire
Beware of executives appearing overly coiffed, like they just walked out of the salon. Too much self-indulgence and emphasis on surface appearance, especially if self-glorifying, are a turn-off. These types lack substance and genuineness. Other affectations or cutesy personal marks like ponytails and visible tattoos also bother me. They are attempts to portray images that I prefer to be demonstrated through actions and demeanor rather than as synthetic add-ons.
Trash Talk, Playing Favorites
Making negative aspersions about analysts or competing companies and products is a cover-up for internal corporate inadequacies. Any type of dissing is low class, and so is the practice of favoring analysts with positive opinions while freezing out those holding negative ratings. When executives criticize a negative research view, it indicates defensiveness. The analyst’s insight was probably perspicacious, hitting close to home.
Once you have executives pegged, it is helpful to observe their actions in times of crisis, when the company is under fire after a serious setback. These are the times to judge management character, to scrutinize their reactions to see whether they take the proper, studied, rational and calm course to rectify the situation.
Frequently executives panic, behaving in a deleterious manner, making mistakes that compound the problems. Such damaging moves during troubled periods are like dousing the flames with fuel. These missteps include:
Assuming a setback is only temporary;
Blaming external, uncontrollable factors;
Becoming inaccessible, turning insular and out of touch;
Firing the CFO or middle management as a scapegoat, while keeping inept leaders;
Taking frenzied, last-ditch attempts or maneuvers to bail out of trouble;
Using financial schemes (stock buybacks, asset sales, capital gains on securities, write-offs, and other balance sheet-related tactics) to aid earnings; and
- Jaw-boning investors that stock overreaction is unwarranted.
Appraising management prowess is basic to determining a company’s prospects. After all, these are the folks who will make or break your investment. You are relying on them to do the right thing, so you need to be a good judge of executive aptitude.
It is all about character. In judging a company, you must gauge management first and foremost. You need to get it right, as in choosing a partner. It’s vital.
So carefully ponder the quality and effectiveness of a corporation’s executive leaders before deciding to invest in the company’s stock.