What Should You Look For In Your CEO?

SUMMARY

  1. Buying a stake in the business means that you are a business owner.
  2. Since we are not actively involved in managing the business, we should look out for CEO who acts in the best interest of shareholders
  3. Three factors I look for in a CEO before I invest in a company

Introduction

There are two misconceptions that I cannot shake off as an investor. One is the impression that all investors who are not quantitatively driven are on the path to poor returns. The other is that what I put in practice – the analysis of the company and the valuations that are in place – will always play out in the real world. Tragically for me, nothing can be further from the truth.

The main issue here is this: Aside from the numbers, financials and data that we can retrieve about a company, what are other ingredients necessary for market-beating returns? Out of the many factors there are to consider, a company’s management team is one that we cannot ignore.

If companies are managed by people, then it would be prudent, perhaps even wise, of us to consider very carefully the quality of the management teams that run the businesses that we invest in. Here are some recommendations on a couple of factors to consider when you are evaluating a CEO.

  1. What is their tenure in the industry?

When we go out into the marketplace and look for jobs, we typically see that the jobs that are available have certain requirements. And one of the most obvious is that they require you to have a certain level of experience. The problem here is that we rarely apply that mind-set to the way we “hire” the CEOs that run the companies that we have invested in.

That being said, we should not be too caught up with knowing simply how many years they have worked at a certain firm or industry. Mark Zuckerberg, CEO and co-founder of Facebook whom I greatly admire, has slightly more than a decade of experience under his belt when it comes to being a CEO. While it may seem like a deal-breaker, he has actually built Facebook to be the 5th largest company on the US stock market. In short, the metric to focus on here is the CEO’s tenure in the industry as a percentage of their professional career.

Another factor to consider is that the CEO should not be moving from one industry to another. We should always be mindful that if the CEO is not someone who has started the company and is running it, they should at least have a reasonable amount of experience in the respective industry in order to demonstrate sufficient skill and care in what they do.

 

  1. Are they building a company that is out to fulfil a mission?

If a company wants to create a culture whereby employees come to work every morning with a mission in mind, the first priority is to define (or redefine) the noble mission with which everyone aligns with.

For DaVita Healthcare, a near-death experience helped it to reshape the reason for its existence. In 1999, DaVita (known as Total Renal Care), was heading down the slippery slope towards bankruptcy. Patients who went to the company’s 460 kidney dialysis centres across the US were not getting the service they have paid for. Employees have lost heart in their jobs and were leaving the company in droves. The company is in tatters as shareholder have decided to sue.

Fortunately for the company, CEO Kent Thiry stepped in to turn the company’s fate around. The main reason why the Total Renal Care managed to not only survive but to thrive was because the company reinvented its culture and instilled a sense of mission in its employees. It then changed its name to DaVita to remind its employees of its core mission. Today, the company has built an extensive moat around its business and is in better shape than it ever was.

To embed and sustain such a dynamic culture, leaders often have to rewire the organization, as Thiry did at DaVita. Needless to say, it not only helped patients improve their health; it also helped shareholders build their wealth.

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  1. Do they have equity in the business that they are managing?

This factor would be crucial when you evaluate the CEO and his team. Whether or not he has an equity stake will determine, to a large extent, the way he drives value for his shareholders. Elon Musk currently owns more than 20% of Tesla. What is more surprising is not the fact that he owns more than one-fifth of a listed company but that he even bought more of it with his own money on the stock market.

As long-term shareholders of companies, we should be more than delighted to find a CEO that is managing the company as if it is the only one that their family will run for the next fifty years.

Conclusion

Finding a company that has solid financial performance is relatively straight forward. Finding a company that is being operated by a CEO who values every stakeholder is much rarer. Companies that are run by a competent CEO with the above traits are likely to be stronger competitors, better innovators and faster to respond to changes in the market. In a world where the business environment is constantly reshaping itself, such a CEO would help the company to stay on top.

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Marcus Ho
Research Analyst, Mind Kinesis Value Investing Academy

Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.

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