oracle of omaha
click to enlarge

Brian McMahon is a partner at Reperio Partners, an Atlanta-based executive consultancy specializing in executive assessment and succession planning. Reperio utilizes a proprietary methodology to help boards of directors fulfill their greatest responsibility to shareholders: ensuring the existence of a pipeline of world-class executives. Brian also provides coaching to executives keen to optimize their work performance and fulfillment.

When a man who became an international celebrity due to the management of his stock portfolio makes known his views on how he considers investment opportunities people tend to take notice. Such was the case recently when a Bloomberg story announced that BUFFETT SAYS PRICING POWER BEATS GOOD MANAGEMENT WHEN EVALUATING COMPANIES and stated that a man occasionally referred to as an oracle “sometimes doesn’t even consider the people in charge” of companies he considers buying. This philosophy is Warren Buffett’s prerogative and one he undoubtedly enjoys from being in a position to make leadership changes should the need arise. Unfortunately, this advantage is not available to most investors. An extensive comment on Buffett’s well-chronicled approach to investing is well beyond this author and the scope of this article: my goal simply is to remind value-minded readers that senior leadership is another variable worthy of consideration when making investment decisions.

Wise investors consider the multitude of risks that companies face before investing in them, and the men and women who occupy leadership positions comprise a specific part of operational risk, which concerns exposure to failed internal processes and systems. Put another way, investors who do not operate on the scale that Warren Buffett does should strongly consider the senior leadership of the companies in which they invest. For while Buffett may take controlling positions in companies that seem to have their markets cornered – thus buying himself time to make leadership changes as he sees fit – investors who do not operate with this luxury entrust senior leadership to act on their behalf, provide steady returns on their investments, and ensure the company is strategically positioned for the future. Over time, even companies with a seemingly unlimited ability to raise prices at will (i.e., those prized by Buffett) will be undone by poor management that acts selfishly, fails to honestly and accurately appraise future opportunities and challenges, and lacks the ability to drive strategic change in times of crisis. It also should be noted that despite Buffett’s reported remarks about pricing being more important than management, some of his largest and longest-held positions (e.g., American Express, Coca-Cola) are in companies whose leadership in the boardroom and the executive suite often have been the envy of their industries.

Another Data Point In Valuation: Executive Assessment as Risk Mitigation

A value investor looking for companies whose leadership is well positioned for long-term success would do well to focus on the attributes that the best boards of directors look for in world class CEOs. Our research and practice indicates that elite executive talent distinguishes itself from its intelligent, accomplished and driven peers in three broad areas we refer to as savvy, flexibility and ego. Savvy refers to an executive’s self-awareness and interest in and skill at functioning harmoniously with others in the company. An executive’s flexibility is seen in how he or she responds to challenges and appraises information. Finally, an executive’s ego is determined by the degree to which his or her pride derives from organizational or individual successes. Based on extensive behavioral interviews and in-depth assessments of senior executives at multiple Fortune 500 companies, we have determined that senior executives worthy of a board or investor’s full confidence are those who consistently demonstrate more of these qualities than their peers.

Leaders capable of divergent thinking, savvy enough to galvanize a workforce for high-tension change, and thoughtful of the whole organization (i.e., stockholders, employees, and the context in which the company operates) are those we refer to as the most viable. Highly regarded and desired by forward-thinking boards of directors, viable executives should also capture the attention of investors seeking long-term value. In evaluating market opportunities not available to most investors, Warren Buffett can perhaps afford to delay consideration of the quality of a company’s top-management team. For the investor bound by more constraints than the “Oracle of Omaha,” generating a thorough understanding of the strengths and weaknesses of senior management is to gain one more piece of a complex puzzle. It has been said time and again that the people make the place. If the wrong people are in place at the company in which you invest, no conceivable market advantage will ward off the inevitable.