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?
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.
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.
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.
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?
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.
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.”
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
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.
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.
^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.