When you invest in a stock, you agree to become co-owner in a small part of that business. Like any investment, you want to be sure that the people in charge are people you can trust to manage the business well. As a fund manager I came to learn what makes a good management team and how to spot these traits. I also learnt that these traits are very rare – when you find such a team, stick close to them.
- They are completely honest and open
A good management team doesn’t pretend that everything is okay when it isn’t. They are open about challenges and mistakes and they confront them head-on. Equally they remain grounded and conscious of the risks when things are going well. They don’t brag or get over-excited. “Humble in Victory and Gracious in Defeat” springs to mind. I think I heard that on an episode of Friday Night Lights, but it makes a lot of sense in this context! I also love the following quote from Phil Fisher:
“By the law of averages some new products and processes will be costly failures or will run into unexpected delays. Such disappointments are an inevitable part of even the most successful business. If met forthrightly and with good judgement they are merely one of the costs of eventual success. They are frequently a sign of strength rather than weakness”
- They care about shareholders, but not too much
The best management teams will treat you like a co-owner in the business. They care about the business as much as you do, and they’ll do everything in their power to generate the best returns for the company over the long run. As Warren Buffett would put it they “truly walk in the shoes of owners”. This type of management will enter into dialogue with shareholders, will explain their strategy, and do everything they can to keep them informed. But they won’t try to appease shareholders where they don’t believe it’s in the long-term interests of the business, nor will they allow shareholders to distract them from the day-to-day management.
- They are frugal
You can tell a lot about management by the state of their offices. I generally try to stay away from companies that have spent too much money decorating their lobby or where the CEO is sporting a perma-tan. Cheap Office, Expensive Stock is usually the way this works. One of my first meetings when I started out in fund management was with Novozymes, a Danish company in an industrial park on the outskirts of Copenhagen. The offices there are super utilitarian. I remember being offered the most god-awful plate of stale cookies I’ve ever seen in my life. But the company didn’t care about courting shareholders – they let the strength of the business speak for itself. And as I discovered later, this cost-conscious culture permeated ever aspect of the company. Over the next 10 years, this turned out to be one of the most successful investments we ever made.
- They are truly invested in the business
Look for management teams that have a high proportion of their wealth invested in the business. Direct ownership is always better than stock options because it aligns the management more closely with you. Ownership of stock options can also be a positive, but they tend to incentivize shorter-term thinking as management becomes overly focused on the vesting of the options.
- They understand the detail
The best management teams understand their industry, they understand the company and they care deeply about it. They can answer questions on any aspect of the business (within reason) because they are keenly aware of each division’s strengths and weaknesses. Avoid the “tourist manager” who are just in it for the glory, passing through on the way to something bigger.
A final word: No matter how strong the management team is, don’t make an investment based on the management team alone. Because even the best management team can only do so much with a bad business. Bear in mind Buffett’s quote: “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact”