So, folks, analysts often say “ah, they have a strong management team.” And the truth is that I have absolutely no idea what people mean by this. I know what they are *trying* to mean - that the management team is not going to make stupid mistakes and has had to make hard calls in the past. But the statement comes off sounding like a bunch of phluff.
So, what do you think is required to say that the management team is “strong”?
Some things that seem plausible:
* “Years of experience in management” (which is good when conditions are normal, I guess)
* Turnaround experience if the company requires a turnaround.
* Pedigrees? Maybe.
* Industry and political connections? Ability to marshall outside help if needed?
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Comments on this or other ideas??
In my experience it is experience that makes a strong management team. I don’t put much weight in their school or degrees, instead I prefer a proven track record of delivering results better than their peers at similar companies. I’m a fan of Missouri’s approach, show me. I’ve seen too many slick-talking managers who could not run a lemonade stand. Experience usually entails a proven ability to adapt their company to changing environments.
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Chad, couldn’t have said it better myself.
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I’ve got a couple of examples.
I’ll start with bad management. I love TTWO as a company. They’re a video game publisher that I’ve mentioned on here before. I’m long currently and have owned the stock on and off for about seven years. Lots of good things about the company: they make great games, the games sell well, and they have some of the most talented developers around. But, Sr. mgmt doesn’t give a rats ass about increasing shareholder value. The only thing they care about is putting out the best possible product. Unfortunately this leads to just about every title being delayed and perpetually dorking up earnings estimates. Also, they’ve been resistent to expand into mobile gaming as it’s not really what they want to do….but there’s good money there. (If anyone is familiar with EA, they’re the exact opposite. “Good” mgmt from a shareholder’s perspective but they just churn out one crappy product after another.)
A stock I owned a couple years ago had great management. EZPW is a pawn shop/payday loan operator. One pawn shop is pretty much the same as another, but what made EZPW great was their plan for future growth and ability to flawlessly implement it. The foresight to expand into Mexico, buying up smaller pawn shops in great locations, and growing organically. Their CEO, Joe Rotunda, laid out a clear growth plan and continually hit their targets.
I guess that’s what you want. Sr Mgmt that sets ambitious but realistic goals that are aligned with shareholders, AND their ability to meet or exceed those objectives.
Ok, so how do you measure this, and how many members of the management team get included in the measurement?
(I’m not challenging your statement; I’m just trying to dig deeper)
You want a quote? Haven’t I written enough already???
Not aware of a way to really keep score, especially anything that would allow you to compare across companies. Since I’m generally a longer-term investor I tend to learn about mgmt as a shareholder instead of prior to investing as I suppose I should.
The best way to measure it, as far as I can tell, would be to listen to the prior 6-8 conference calls. Learn about the initiatives mgmt said they were going to implement, and then determine 1) if they were able to accomplish their objectives on time, and 2) if the outcome beneficial to shareholders. Even if mgmt lays out a roadmap and works it to perfection, there’s a chance they just went in the wrong direction. Just a different way of sucking.
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I like to look at the team dynamic. How did they come to be? Often a solid team is hard to come by. A bunch of experienced strangers comes across all too often.
Not to be cliche, but diversity with checks and balances works here too. There have been studies performed that companies with more females in management tend to do better than those with only males.
i look at the their reported numbers relative to peers….if its better than their peers, the management team is good…..all that “good management” talk is just window dressing unless you got the numbers to show for it…..
I like to try to get into their personal biographies if I can. Only when I researched Steve Ballmer’s history did I start thinking about going long MSFT.
And no I don’t think there is any way at all to quantify or measure this ability. It’s like measuring “creativity”. How would you do that?
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I didn’t say “quantify.” I said “measure.” You can have a method to generate ordinal measures even if you can’t generate interval or ratio level measures.
If something is stronger or weaker than others, you have to have some way to distinguish one from the other. The process of placing these on a spectrum is measurement.
You want a quote? Haven’t I written enough already???
all the nice stuff you read about management are advertising….ignore it…only thing that matters is their track record….
Maybe you just assume “strong management team” as the default position and then start looking for evidence of crap.
So maybe “strong management team” just means “lack of evidence that they guys are idiots or crooks or hate each other.” Which of course could mean lazy analysis too.
I always feel just a little like I’m going to vomit when I hear some TV analyst start off their discussion with “Well, first, they have a strong management team.” I almost don’t want to hear the rest (unless they are specifically addressing that the company is in a turnaround kind of situation, and then the experience with turnarounds is relevant).
If they say it at the end “And finally, there’s a strong management team,” I tend to cut them a little slack in the sense that “ok, there was presumably a lot of pressure to say something about management, and so they threw something in at the end.”
You want a quote? Haven’t I written enough already???
i want to hear….”they have a strong management team, they were able to grow revenues by X+Y% vs. X% for peers and kept cost down below industry levels”…..
As a broad general rule, the smaller the company, the more important management is.
The larger the company, the more important overall business trends are, and is the company positioned right. Althought one could argue you need decent management to steer the trend
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Whenever I hear that, it’s just another buzzword to me. If I want to really dig down, I’d look at their bios and see what their experience is like. I tend to favor management that have built up tenure at a company and have an emotional investment to the firm.
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The whole “strong management team” does sound a bit like some sort of Cramerism BS.
Shareholder friendly is a different thing. I get what that means.
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If you think it’s “Cramerism BS”. I would like to introduce you to one Mr. Leo Apotheker.
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Fair enough, but just to play devils advocate for a minute, how many sell side reports have you seen that have identified management as weak? I can’t think of any.
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^SS here; ya you can’t really say they are weak b/c that just severs management access. You can get a little creative with the wording, but we have to use extreme caution honestly.
What I look for expereince and vision. Experience to see if they can execute and vision to see if they are on the right track. I usually compare the vision to their peers, talk with consultants/industry experts, and customers to see whether it makes sense.
I do probably pay a little more attention to pedigrees than others being in med. devices; for the CEO, I look for a medical engineering (actually any engineering is pretty good) and/or strong sales background.
For the CFO, pedigrees are less important IMO. Just make sure they have good experience that follows the typical pathway to becoming a CFO.
I tend to think less about “strong management team” in the literal sense and more with respect to corporate governance and ability to execute. There are a few things I think about when I vet a management team:
(1) How far have actual, delivered results been in-line with or better than management guidance? Do they have a demonstrated track record over many quarters of being able to do this?
(2) Does the management team communicate clear goals and metrics that can easily be observed and evaluated by shareholders?
(3) In Q&A, how often are they willing to internalize both successes and failures, rather than attribute shortcomings to macro or industry factors? Do I have a good dialogue with managers or do I find them to be evasive or over-confident?
(4) How is management incentivized and compensated? Are they evaluated more on earnings or cash flow-based metrics (better for shareholders) or are they driven more by top-line?
(5) Is the board structured such that ineffective senior managers can be replaced with relative ease, or are there a lot of internal directors or things such as dual-class structures that would make inferior managers difficult to fire?
My point of view on this has been influenced by reading some of Warren Buffett’s earlier essays along with several experiences that I saw in private equity/restructuring. There is also a good chapter about conducting management team interviews in a book called “Best Practices for Equity Research Analysts” by James Valentine, which I recommend.
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Numi, why did you quit PE? Isn’t PE suppose to be a prime destination a lot of ppl wnat ot get to? the guys I spoke to in PE are pulling in enough cash to get a date with Kim K.
You never know, maybe numi already had dates with Kim K…..
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
palantir, i was reading the MSFT annuals again….after gaining some understanding of GOOG, i’m beginning to see why MSFT is very good indeed…..i like goog more due to growth prospects but msft is downright cheap and high quality earnings….
what I don’t get is, why is the market not showing more love to them? they got a decent dividend too….net of cash they’re trading close to 10X FCF….and these are pretty steady flows too…..
the most logical thing to do here is to write off their online search biz (which they did) and ignore the XBOX thing …..after doing that, you got two very strong revenue/earnings stream with windows/business……
I’m rambling but i’m inclined to take another position in a tech stock (i don’t even consider them tech in the sense they will lose their position overnight, try working in finance without excel)….
In my view, strong management team involves smart people who are unusually committed to the company. Prime example is Steve Jobs and other talented founders who are driven by far more than financial incentives. In rare cases, their egos can get in the way (i.e. Yahoo’s Jerry Yang), but these guys put every waking hour and every ounce of their talent into their company. They won’t sell out for short term gain and competitors cannot poach them.
Strong management is definitely not about years of experience, whether its in the company, the industry, or just plain old. Good operations people are necessarily to fill the gaps, but they’re replaceable.
I think I can only believe in “no evidence of crappy mgmt team”. To find the crappy mgmt team one can do a big checklist with all that Corp Gov stuff that is summarized at CFA L3 and/or your books of preference - we basically want people who don’t look like crooks, don’t have big egos and aren’t lazy asses. I’m using crooks here in the widest possible way - any guy who has motivations that differ too much from long term shareholder value may be bad news (this will actually include variations on big egos and lazy asses)
It’s really hard to judge a possible strong mgmt team. Even if the analyst is really really strong on all business little blocks (strategy, marketing, talent management, etc) it’s still hard to be able to judge if what the top dogs of the industry are doing is right or wrong - not to mention traits like character. Even assuming a CEO is experienced, honest and hard-working, he probably knows way more about their business than we do - and on top of that we have very limited access to information.
I can’t even have a strong opinion on how good Steve Jobs was/was going to be after 2010. Did he left a strong culture to keep Apple at the top without him? If alive, would he keep winning? Could his ego become a downfall? A few decades ago Lee Iacocca was viewed as the utmost genious until things got rough; so was Alan Greenspan.
I feel that management data is way more useful when you want to short a company than to go long on it.
If I were to model it, I would probably do a big checklist and then give very little positive weight for the “I don’t think they’ll screw me over” effect, if present.
How about trying to find “strong management” for Sovereign debt? That’s a load of fun!
Can I ask what do you see in MSFT after reading G’s report?
The way I see it is:
Windows: Mega cash cow, business will decline according to conventional wisdom, but even if it does, MSFT can still milk it. (However it may not decline…tomorrow is a mystery)
Server and Tools business: Strong business with growing revenues and margins.
Biz division: Enterprise software + Office, growing presensce in enterprise, revenues and margins are rising.
Entertainment division: Xbox has started doing really well last few years, and I expect Windows Phone is going to do well too. It seems to be a good product. This used to be unprofitable, but now margins have been rising last 3 years. It may well end up owning gaming business…esp the way Sony is flailing about. Furthermore, there have been a lot of changes happening within microsoft, especially in their consumer products. Just look at their design initiatives! I couldn’t see Metro happening under BillG.
Why it is undervalued:
1) People just look at MSFT and say: “MSFT will decline because of cloud computing”….I’m skeptical of that view. There is much more to MSFT than Windows desktops.
2) People also have little faith in Steve Ballmer. (eg David Einhorn), whom I think is mistaken. They tend to view BillG as a God, but fail to recognize that many of MS’s missteps and failures were because of BillG’s views and under his leadership. It’s a mistake to blame everything on SteveB.
MSFT has also rapidly been buying back shares, and increasing dividend.
The search business is losing about 2-3 B a year, which is not really that much. Even if that whole thing was canceled, only a small amount of value would be created IMO. What exactly are you looking to ignore in Xbox?
I’m starting to warm to Goog, their search business has a moat. What I’m afraid is what if it does a MSFT and stays flat for 10 yrs….but I need to smoke on this a little bit more. Somewhat skeptical of these random other things Goog makes. Self driving cars? wtf o well.
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
I think after reading/thinking about google I got a sense of the space overall…the pieces just sort of fell in place in terms of understanding what each company do and their position……after finding out how google was able to own the search/internet navigation space i saw how msft owns the operating software space and its “moat” per se…..really simple stuff….
I’m not completely clear on “cloud computing” and who win will but MSFT will have their hand in there due to their enterprise relationships…
MSFT revenues/profits for windows/business is strong on its own but I think the search/phones/games segments can be ignored (i assign zero value to it)….
Thing I like so much about google is their “big thinking” as exemplified by the self driving cars (imagine when cars in the future drive itself through the use of google maps of some sort)…i mean, they have big ideas (really big) and when i started to think of what they’re looking to do 10 years out, i see amazing possibilities…..lots of their stuff will fail misserably (not even sure G+1 will even work or their attempt at social networking (wouldn’t be surprise to see them buy out FB one day))….
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I’m glad google exists as it does. I don’t care if it is super profitable. But the stuff they come up with makes my life so much better. Without the stuff google does the iphone is about as half as useful.
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i love how google is positioning itself for aapl’s eventual irrelevance…..one of the subtle (or maybe obvious) things I am noticing…..
Hmmm…what growth are you projecting for Google? I think that if Google is going to continue this growth its undervalued but if it’s slowing down to less than 10% growth a year…perhaps not. Don’t you feel that their core market is saturated as is? I don’t forsee Google making inroads into China…ever.
Cities teem with evil and decay, let’s give it a good shake and see what falls out!!
I assume china is out of the picture ….
in terms of growth, i’m thinking long term (5+ years)…is it north of 10%+, absolutely…..i don’t expect them to do much in terms of earnings in the near term, but i’m focused on the impact they will have on the world in the long term which translates into huge dollars….
imagine if you owned google and how much you can pull from it? aapl is a $600B dollar company today as a benchmark…
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