How to spot leading management
3 minute read
The first time I met Daily Mirror owner Robert Maxwell I was a young analyst. I asked him a perfectly legitimate question about an issue in the accounts of one of his companies that perturbed me. He swivelled towards me, glowering, and snarled: “I know your boss very well.”
The nature of the threat was as opaque as his accounts, but it was definitely a threat and intended to dissuade me from digging too deeply. I recognised him as a bully and took it as a warning signal.
Meeting company managers is one of the benefits a fund manager tends to have over the DIY investor. But the regulators do not allow these managers to tell us anything in these meetings that they do not tell everyone. So how big an advantage is this? Often you are looking for subtle signals.
I remember another young fund manager who returned from a company meeting once and told his boss he didn’t like the CEO. The boss replied: “I’m not asking if you want to have supper with him; I’m asking whether he’s going to make you money.”
I like company meetings, but I have to be careful not to put too much weight on my instincts because they can be wrong.
I met one company manager who I found to be utterly charming. I liked him. But a few months later my co-manager, Laura Foll, came back from a similar meeting complaining how he had been patronising and rude. That also sent a signal – if an older male manager is incapable of treating women appropriately is he past it? And what value was my initial judgement?
The reality is that most of our work as investors can be done by studying the numbers and written reports.
Markets are in a period of change. We have already seen teams put through extreme tests over the course of the pandemic. Now, as we look to the other side of the crisis, we have supply chain issues, rising interest rates and inflation the highest it has been for 30 years – not helped by the events in Ukraine.
This is a time when strong management can make a significant difference to how a company copes.
If you are looking for signals about the capabilities of a company’s management team, you do not have to meet them in the flesh. So what should you look for?
We like managers with a high level of knowledge and understanding of the industry or sector in which the company operates. This is particularly important in young and growing tech companies.
A good example is the team leading one of our holdings, Illika, a producer of solid-state batteries. Graeme Purdy has been CEO for almost 18 years and led the company through two rounds of venture funding. He was previously CEO of a technology company in the Netherlands and is also a chartered engineer.
We have found that our largest smaller company positions are led by people who have been in the industry for many years. Another example would be Robert Forrester, who founded Vertu Motors in 2006. Today it is the UK’s fifth largest automotive retailer, employing 6,000 people. Before launching Vertu Forrester was a Finance Director and Managing Director at rival Reg Vardy.
Any change of management makes us nervous – especially if we see no need for a radical shift in direction. We are usually reassured by promotion of proven senior staff from within. It is not infallible as a rule, but if they have been with a company for a long time, they not only know the industry but have an important understanding of the company’s culture. This can make the management transition smoother.
Regardless of how much collective experience it has, a team will inevitably encounter unfamiliar situations during its tenure – a global pandemic, for example!
Few companies have been able to weather the coronavirus crisis and its effects without making any changes. Most have had to continuously adapt, and some have needed to completely reinvent themselves. We value a company’s ability to adjust to fit the new environment and the willingness of management to do so without cynicism.
We have always been overweight in smaller companies and have found that they tend to be more easily adaptable. One company that adapted itself quickly during the pandemic was Oxford Nanopore, which used its gene sequencing technology to develop a rapid Covid-19 diagnostic (and went on to get material sales from this area).
Often, large companies find it more difficult to commit to the change dynamic successfully, but some manage it. Rolls-Royce underwent the largest restructuring in its recent history in reaction to losses incurred from the pandemic. Faced with grounded planes and order cancellations, the company needed to cut costs and raise cash. This unfortunately meant redundancies, alongside withdrawing from peripheral activities and shortening management lines of communication, among other things.
Incredibly difficult decisions and disciplines put in place during a time of crisis mean Rolls-Royce now appears to be better placed for a pick-up in aerospace activity. Look for evidence that management are able to adapt.
Evidence of consistency is important too. For me, one of the most important questions to ask is: “Has this team done what it said it would do?” When we meet management we record and track what is discussed and predicted and will question inconsistencies in future meetings.
Similarly, we review outlook statements, which are readily available to the public. These are incredibly useful for comparing what was promised or forecast with what actually happened.
During this process we ask whether there have been any material disappointments under this team, while acknowledging that some losses may be outside of company control. Occasionally, external forces cause substantial and unavoidable damage, as we have seen with Rolls-Royce and other aerospace companies. We try to recognise what is within management’s control and evaluate performance within those parameters.
Open and honest
Finally, we recognise that everyone makes mistakes. We do not expect a completely faultless record – but we look for honesty and timeliness when it comes to admitting mistakes.
We find that those who are most up-front about their mistakes tend to rectify them more successfully than those who try to ignore or hide problems.
One example is Dave Lewis at Tesco who had to deal with the accounting scandal shortly after his appointment as CEO. He was a boss brought from the outside, but from a relevant industry and from a company with a strong culture of integrity – Unilever. He apologised, won the trust of the City (and us – it is a stock we now own) and brought the business through to the other side of the crisis. That compares with the Sackler family you will see represented in the upcoming Netflix drama “Painkiller”, who resolutely refused to accept blame for aggressively marketing painkillers that helped fuel the American opioid crisis.
We have made mistakes ourselves, of course, but this approach to assessing management has served us well.
Maxwell could have avoided my question while being extremely pleasant – the point is that he was unwilling to be open and honest. That is what made me unwilling to invest with him. The fact that he was a bully just made me less inclined to be in a room with him.
Please read the following important information regarding funds related to this article.
- If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries.
- Some of the investments in this portfolio are in smaller company shares. They may be more difficult to buy and sell, and their share prices may fluctuate more than those of larger companies.
- This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
- Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
- The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
- Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
- The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.