In yesterday’s newsletter we looked at the need for managers of your investee companies to be capable in two area, (1) day-to-day task efficiency, and (2) long-range planning. Today we look at the three other characteristics Philip Fisher required, (1) integrity, (2) outstanding labour and personal relationships, and (3) outstanding executive relationships.
Shareholders need to feel confident that their investment is in good hands; that the CEOs and management possess honesty and personal decency in their business dealings.
is only too easy for executives and management without integrity to benefit themselves at the expense of the owners of the company. If there are any doubts about the integrity of company management, then investors should take their cash elsewhere.
This is where Scuttlebutt can prove essential; how else can you find out about the character of the CEO and his/her team without speaking to them directly or obtaining the views of those who know them?
Bad news happens, and management with integrity does not try to conceal it. They have to be able to stand up in front of their shareholders, and inform them of adverse events, as well as favourable developments.
Warren Buffett gives a masterful example of honesty in the event of bad news in the Berkshire Hathaway Annual report for 1999: ‘The numbers on the facing page show just how poor our 1999 result was. We had the worst absolute performance of my tenure and compared to the S&P, the worst relative performance as well….Even Inspector Clouseau could find last year’s guilty party: your Chairman. My performance reminds me of the quarterback whose report showed four Fs and a D but who nonetheless had an understanding coach. ‘Son,’ he drawled, ‘I think you’re spending too much time on that one subject.’ My ‘one subject’ is capital allocation, and my grade for 1999 is most assuredly a D.’
Even the best-run companies with excellent prospects are prone to failures and setbacks. Unexpected difficulties, changes in demand and disappointing new products will occur sporadically, and should not deter the investor who is confident in the management team.
Any suspicion that management has covered up a setback or problem should be taken as a warning sign; management may not have a plan to solve the problem; it may be in a panic, or it may have the arrogant attitude that it need not bother to report such things to shareholders.
Dividend policy is another area where managerial competence and integrity is crucial. Bad management can hoard cash, far beyond what the business needs and therefore not in the best interests of shareholders.
Bad management may also divert cash into projects which offer poor returns for shareholders, but are good for their own position and salary.
Conversely, bad management may increase dividends needlessly and sacrifice good opportunities for reinvesting earnings in the company. Here they act like the farm manager.....To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
I'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk
investing is about making the right decisions, not many decisions.