Re: the value in management
I could not agree more. While I may disagree with
you on the Richard Scott ouster -- he is a man not
tuned into the finer points, much less the gross
points, of ethical medicine -- I certainly understand
the importance of management.
Take Corel, a company with several significant
assets as well as brand-name recognition. Mike
Cowpland and the management are suspect at best, however,
and the stock has performed poorly due to management's
ability to spend up to nearly the level of sales
each quarter.
By contrast, take Warren Buffett. He invests only
in company's in which he can leave the management
in place and relatively unattended. His biggest asset,
IMO, is his ability to find brilliant management
among undervalued assets. This skill has made him
the most successful investor ever.
Yet we routinely invest in balance sheets and
income statements, ignoring management's true
qualities. Are profitability and ROE measures truly a proxy for
management's ability? Wouldn't that be easy? Yes, too easy.
So where are we to look, and how are we, the smaller
investors, to get the level of insight into management
possessed by the Buffetts of the world?
Let's look at several means by which we can measure
good management.I'm looking for feedback on any of
these points.
1) Insider ownership -- Good managers mustn't have a solid
chunk of their own fortunes embedded within the enterprise.
It simply helps eliminate a portion of the management-shareholder
misalignment of interests. Yet insider ownership is not
necessarily a sign of good management. Look at Chris-Craft Industries
and Herbert Siegel -- he's just sitting on assets worth more than
the market cap, despite the fact he owns such a huge chunk. Wouldn't
he want to increase his personal fortune? Can it be he
is simply not a good enough manager to do it? So, we have no
guarantees with high insider ownership. But I'll take it anyday
over little to no insider ownership. Ron LaBow of WHX had a large
part of his assets in WHX -- a major reason I had faith he wouldn't
let it fail or give away the house to the strikers.
2) Past/current companies owned/managed/created by the management.
Mike Cowpland made his fortune on the backs of Mitel shareholders.
Are we to believe he has changed and that he will do right by
Corel shareholders? Have the current management of a corporation
under consideration for investment ever been unethical or
dishonest -- and been found out by the SEC. I will never invest
in 3Com, no matter the value or potential, because its management
was so incredibly selfish when it sold most its shares in the
70's, before the fall to the 30's. IOW, can management be
trusted. Unfortunately, this is more useful as a marker for
companies to avoid rather than companies in which to invest.
3) Executive compensation. When Open Text's management repriced
its options to reflect the terrible stock performance (26 to
6), I started looking for an exit. Yes, the stock has soared and
and I believe in the company's product, but what is the primary
motivation of management here? Is the focus short-term or long-term?
Hard to hold long-term and ignore short-term fluctuations if
management doesn't think the same way.
4) Call the company. Does management place high value on
investor relations? Not PR, but IR. Will the CFO call back
if I request him/her? Or will an inept IR rep reveal ignorance
greater than my own? Does to whomever I am speaking express
confidence and logic, or is it rather flash and emptiness?
This is the hardest part for me to interpret. And I never
know for sure how I am doing. Obviously, this is virtually
impossible to do with the large cap big names. E-mail has
been a boon. An investor on the Corel thread actually
got the CEO to write him re: the company's future.
5) Ratios. Return on Equity. Return on Capital. Gross
Margins. Accounts receivable to sales. Inventory to sales.
I find the inventory management to be key. Does inventory
grow appropriately with sales, or faster, or slower? If
a turnkey inventory management program is in place, is
the management of it efficient? Unlike ROE and ROC, the
inventory/sales numbers are hard for the CFO to fiddle
with, especially if one has an eye on AR. How the
company expenses and capitalizes its various costs also
tells me something about management's long-term fidelity.
If they are capitalizing R&D or other costs, look for
them to show up in LT assets on the balance sheet -- if
these assets are ballooning, I start to look for
illicit capitalization that will tip me off to management's
time-frame.
6) Shareholder rewards. How is the management rewarding
shareholders for corporate-wide successes? a) Share
repurchases -- is the company following through on
its "promises" to buy back shares. b) Dividends --
becoming less relevant thanks to double taxation. I'd
rather they actually buy back stock. c) Reinvestment
of retained earnings into various corporate uses --
is management obtaining sufficient return from these
uses in order to justify the increased risk of
spending shareholders' share of the earnings?
I'll stop for now, but am anxious for feedback. This
issue is crucial to finding brand name values and
turnarounds.
Good Investing,
Mike |
