Analysis comes in two forms – qualitative and quantitative. The quantitative is easy; you can get your answer from a calculator.
The qualitative part is much more difficult. There is no hard and fast rule for it. There is no calculator that can give an immediate rating of a business’s executive team.
What to Look for in Corporate Leadership
Passion only gets you so far. I don’t care what people say. Executives that are passionate about their business are great. I can agree here.
But executives that are passionate about their business and shareholder interests are even better. It’s good to know that Wall Street has a heart, but if your goal is wealth, you’d probably agree with me that an investor is a better steward than a philanthropist.
This is Buffett’s take, too. He likes corporate management that looks at a business like an investor.
Picking the best investment
There are plenty of emotional, touchy-feely issues in running a business. I don’t think there is any manager in the world that never had a single management issue. But at the C-level, those kinds of issues are of a much lesser concern.
For C-level executives, the focus should be on managing the company’s money. Most business decisions are about capital allocation. Capital allocation is key to any business, but it becomes especially more important in more competitive businesses.
Look at IBM (IBM). It’s in the tech space, an industry known for competition. But IBM’s managers know when to back off from competitive markets where IBM cannot have an edge. IBM turned away from its consumer product lines to focus on its business to business lines.
Businesses go to IBM for an all-in-one shopping experience. Individuals in the market for a laptop computer will purchase it from a third-party – a retailer. IBM’s business to business products are sold directly based on the customer’s needs. So IBM can add much more value in its enterprise products than individual computing products. That’s where the company should focus.
Staying Small, Growing Wealth
IBM is a pretty big business, but it could be bigger. It could have kept its businesses in the competitive consumer product market, or venture into some other channel. There’s always a tangential way to grow a business.
The opportunity for growth isn’t always realized. In fact, I would say it’s much less likely to be realized. Billions of dollars are wasted chasing opportunities in which businesses have no opportunity for an edge.
IBM takes the safer route: reinvesting in its best products – the products it has right now. It’s not just R&D, but also share repurchases. In the past 10 years total share count fell by 30%. IBM could have taken the money and thrown it at high-risk and potentially high-reward opportunities. But the best route was the safest route – it makes more sense to invest in a company with a proven model than new, untested business models.
IBM vs. Microsoft
Bill Gates is one of Warren Buffett’s best friends. Buffett thinks Gates is a genius. But Buffett’s portfolio is void of Microsoft (MSFT), and chock-full of IBM.
Why? Management and capital allocation.
IBM’s service-oriented business is its best. Microsoft doesn’t have that kind of focus. Don’t get me wrong – Microsoft has plenty of great products. But only two make any real amount of money – Office and Windows.
The rest are bottomless pits for money or attention – or both money and attention.
IBM has focus, and it has some of the most shareholder-friendly management on Wall Street. IBM’s management looks at their capital allocation problems like an investor. Its existing business is safer than a potential new business. Repurchasing shares in quantity won’t make headlines. It won’t look as cool as some new tablet or shiny device, but it’s certain. Certainty is everything.
So, above all else, management should speak like investors do. Far too often do executives become obsessed with growth, rejecting much safer reinvestment in the business that is “good enough.” All in all, the size and scope of a business has much less to do with the total return for investors. Management that understands that truth will provide the best return to investors.