I recently finished Phil Rosenzweig's "The Halo Effect". This is a thoughtful book about how much of what passes for academic research into the the underlying drivers of business success is nothing more than the reflected light of historical achievement.
Rosenzweig rips into such books as "In Search of Excellence" and "Good to Great" as nothing more than anecdotes, disguised as rigorous academic research, about business that were successful when these books were written. While not a comfortable message, he gives sheer luck its rightful, prominent place, along with strategy choices and strong execution, in drivers of business success.
Rosenzweig believes that there is no instruction manual for aspiring business leaders to follow. Business is too unpredictable. A leader who makes the "right" strategy choices and execution approaches will more than likely create business success. However, there is no way of knowing a head of time, what those choices should be nor is there a particular decision methodology that will more often than not lead to success.
This got me thinking from an investor's perspective. If looking at the historical performance of a company is not necessarily a valid indicator of leadership's ability to create future success, is there a way to evaluate the quality of a firm's management? Certainly, if you are a wall street analyst who is able to attend management briefings or someone who has the time for management-led earnings conference calls, you can make an informed judgement about the individuals leading a company. But if you do not fall into these categories, is there any way to make an informed judgement about a company's management?
Perhaps I have spent too much time reviewing company proxies, but I think there are some important clues to the quality of management contained in them. My list includes:
- Is there more than one director or officer with the same last name. Nothing wrong with giving your son a job, but does it have to be as President, CFO, or Director?
- Does the Board include too many of the usual suspects? If I see too many ex-Presidents or Directors who are on multiple boards, I wonder whether this is a company looking for publicity or brand names to build confidence among less discerning investors rather than seriously looking for the diversity of experiences and views that a strong Board needs.
- Does the company provide a lot of perks to its top executives? I see nothing wrong with perks for those lower in the organization. Since most of us don't go around telling everyone about our big raise, Perks can be a nice, public way of recognizing achievement. Everyone can see our big office, special parking place and blackberry. At the most senior level, however, everyone does know how much we make - its all public. Good management is confident enough to avoid the ego gratifications of perks that have no strong business rationale.
- Does the Company endorse "Say-on-Pay" type proposals? I want a strong Board. If they do not have the confidence to set compensation without shareholder confirmation, I would have doubts about their ability to make all the other decisions necessary to run a company.
- Is the Compensation Discussion and Analysis three pages or less? Great. Compensation should not be that complex and it should not take more than two or three pages to explain it.
- Is there a lot in the proxy around severance benefits and employment agreements? Other than as a recruiting tool to induce an executive to take a risky move, there is rarely a good case for an employment agreement and for a severance plan any richer than that provided to the broad-based employee group.
- Similarly, are retirement benefits excessive? Executives should not be focused on attaining rich retirement benefits. That seems to be something more appropriate for the stick-it-out-until-death attitude of postal workers.
