In today's edition, we will learn more about the criteria and techniques taught by Michael Shearn in his book The Investment Checklist, to assess the quality of management and executives of a company or a real estate fund.
At first, it is necessary to emphasize the importance of running a company. However, it is often underestimated by investors. Good management can make a good business even better and maintain its competitive advantages in the long run.
Think of the case of Apple, whose employees and managers are always innovating and creating lines of business that create value for their shareholders. As an example, we can think of AirPods (wireless headphones from Apple), a new line of business for the company, unexpected by the vast majority of shareholders. The creation of this line could only be achieved because innovative employees and administrators are constantly taking new avenues to generate value for the company.
Poor management can bring significant problems to good companies. This can happen through cases of fraud, corruption or even by the incompetence of the process of being able to keep up with market innovations and end up leaving the company behind in relation to its competitors.
We observed that some companies were unable to keep up with changes in their sectors, even though they were market leaders for a period. This is the case, for example, of companies such as Kodak and Blockbuster, which, due to the inertia of management and the poor reading of the dynamics of their sectors, lost space to more innovative and attentive companies.
In this sense, we realize that the executives of a company can be decisive in the long-term success or failure of the company. The investor must therefore carry out a thorough analysis of who are the leaders of the company in which he invests.
For Michael Shearn, the best way to assess a company's management is to look at its history and how it reacted at different times. As you understand the behavior of executives in different situations in the past, you can predict how they will behave in the future. Therefore, it is preferable to observe favorable and unfavorable periods for the company, in addition to checking how the managers acted in each one of them.
It is also important to analyze the profile of the company's main executives, such as CEOs and CFOs, in addition to checking their resumes and searching for content produced by them, such as articles and interviews. These surveys can help in understanding who are the people behind the company.
According to Shearn, it is important to analyze what motivates managers and why they are, professionally, where they are. Look for evidence in four main areas: the manager's passion for what he does, his competence, honesty and transparency.
For Michael Shearn, there are basically three types of managers:
- Owner Operator, OO (entrepreneur owner): the company's president has a passion for his business, a lot of experience and, typically, is its own founder. For example, Warren Buffett, CEO of Berkshire Hathaway, and Sam Walton, founder of Walmart.
- Long-tenured manager, LT (long-time manager): the company's manager has extensive experience in the sector and has moved up to high-level positions, building a career and being promoted within the company. He is usually very technical and, because he is not qualified for positions as CEO and CFO, he ends up making mistakes. It can bring bad traditions of the company.
- HH - Hired Hand (hired labor): manager with limited experience in the business and who has worked in the sector for less than 3 years.
They are usually managers hired from other sectors to make a change in the company. They are usually managers who seek to improve the business in the short term, but do not have the vision of owner for the long term. According to Shearn, these managers are good at reducing costs, but not increasing revenues.
Note that there is a decreasing order of experience between the OO manager and the HH manager. Thus, the closer the manager of a company is to an HH manager, the more risky it will be to invest in him, given that this executive has no history that proves his excellence in the sector.
An important trait that we must observe in management is the remuneration of executives, that is, whether the salary and bonuses of those who lead the company are in line with the interests of shareholders.
You need to understand whether managers have rewards for short- or long-term results. For example, a CEO who has $ 100 million in company shares and, in addition, has an annual salary of $ 1 million, will prioritize his company's long-term success over the salary of his job.
On the other hand, a CEO who owns $ 2 million in company shares and receives $ 40 million annually will tend to prioritize the maintenance of his job and his salary, being able to resort to acts that only aim at the short term and end up deteriorating the long-term operation. company's term.
Thus, in Shearn's view, companies tend to be much more successful in the long run when their CEOs focus much of their compensation on stocks, rather than gross wages.
Analyzing the work of a company's executives and management means seeking to understand the alignment of interests between minority shareholders and managers, as well as the competence of those who run the company. This analysis should not be underestimated or ignored by investors.