Macquarie recently held their annual conference, a 3 day event where hundreds of companies present to the financial community. We attended, and saw a number of CEO’s present about their businesses. One insight we seek to gain from these conferences is a better understanding about management.
For me, Jamie Pherous of Corporate Travel Management was the standout manager, as his enthusiasm for the business he founded was obvious for all to see. There is also strong reason to believe that his passion has translated into strong returns for shareholders, with Corporate Travel’s share price today up over 14x in the five years since listing. Corporate Travel has often looked expensive, but management have consistently met growth expectations, justifying the high share price to date.
At a broader level, research by Bain and Co, suggests founder led companies like Corporate Travel have dramatically outperformed their non-founder led peers. One possible narrative is that founders care more deeply about their business than hired managers, leading to greater care with strategy and execution, and outperformance over time.
It seems that most investors appreciate the importance of good management, however most continue to focus on the horse, with much less consideration given to the jockey. There is good reason for this, as assessing people is much harder than assessing numbers. To help with this, we have identified 5 simple points to assist with identifying good leaders.
Does the business have a good culture?
The best leaders are able to get the highest productivity out of their employees by inspiring and empowering them. Evidence of this can appear in high net promoter’s scores, favourable reviews on employment review websites and positive comments from suppliers and contractors.
Are management proven in their field?
In this case it is worthwhile checking if management have done similar things in previous roles with great success. In Corporate Travel’s case, Jamie Pherous had been running his business successfully for 16 years before entering the listed space.
Have management done what they said they would?
This can be measured by looking at past statements and the progress made since the statement was made. An obvious metric is earnings guidance. There is no requirement for a company to issue earnings guidance, so if a company chooses to issue guidance, the unspoken rule is that it should only be met or exceeded.
Has capital allocation been rational?
Capital allocation is one of the most important factors to long term value creation. If a company’s share price is cheap, buying back shares is one of the most certain paths to value creation. However, at higher prices, its effectiveness diminishes and at even higher prices, it can be value destroying. Strong capital allocators prioritise uses for capital, and only direct it to the highest returning option.
Have the leaders backed the business with their own money?
Quite simply, if the leaders believed in their business, you would expect them to have backed the business with their own money. If the most knowledgeable people about the business don’t hold shares, perhaps there is a reason why.
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