Mason Hawkin’s LongLeaf Partners is out with its third quarter letter. Hawins has some interesting comments on how he evaluates the management of potential companies. Below is a brief excerpt followed by the full document.
Before we make an investment, we attempt to insure that the person running the company will meaningfully contribute to our successful outcome. We conduct our diligence in four primary ways.
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First, we see how aligned the CEO’s interests are with shareholders. Significant stock ownership on the same terms as other shareholders is the optimal formula, but we also examine the overall compensation structure to fully understand management’s economic incentives. Second, we review the CEO’s operating and capital allocation record, at the current company and in previous roles.
Third, we use our vast network of clients, corporate managers, industry experts, and friends to find out everything we can about the CEO, including personal as well as professional insights.
Finally, armed with our research, we normally meet with the CEO and CFO not only to ask questions about the business, but also to determine whether management approaches decisions with the passion and orientation of an owner-operator focused on building value per share. The board can also impact our results, especially as it oversees capital allocation decisions. Before investing, we consider whether board member are significant stock owners, have relevant knowledge to assess the CEO’s work, and have a
record of strong governance and oversight. We weigh all of our research to determine whether management and the board are committed to improving the company’s competitive position, growing intrinsic value per share prudently, and representing our interests as shareholders.
LongLeaf Partners Q3 shareholder letter