A smart race-track operator would say, “both.” The horse’s name is the main event, but who the jockey is matters. A good rider can get a lot more out of a horse than people expect.
It’s that way with a company’s management. Good managers can inspire their staff, transform their marketplace, and get more value of corporate assets than anyone thought possible. Bad managers act like poison in the well: anyone who comes near gets sick.
So how do you tell if a company is managed well? I look for three things: first, is their compensation reasonable? Is it in-line with their peers and the size and nature of their business. Bosses who treat their firm like a piggy bank are more likely to break it when they need more change for their toys. Second, is the firm still managed by its original team, or has it gotten over “founder’s fever” and brought in professional management? Large, global companies need immensely talented leaders. It’s unlikely that the requisite skills will be confined to one family, however passionate they may be about the product. Finally, what is their background? Did they rise up through the ranks, mentored along the way? Executives who have been part of a coaching culture that develops leaders tend to keep up the process and develop new leaders to fill their shoes.
Of course, it’s great to meet the folks who run these firms and talk with them about what they see as their greatest challenges and opportunities. Sometimes listening to conference calls and speeches can give you a sense of their capabilities and character. But those can be misleading well. Personal charm is no substitute for effective leadership.
Great business leaders create value. Investors will profit as management implements practical processes that build their business over time.
Douglas R. Tengdin, CFA
Chief Investment Officer