Wednesday, December 28, 2011

signs of a good CEO

It is widely known that in the long term, management quality has a leg up on profitability because profitability cannot be sustained with a poor management. Based on Buffett´s thoughts, here are some signs of a good CEO.

First and foremost, track record matters a lot. In the case of Buffett, all Berkshire subsidiary CEOs have a proven track record in their respective companies or in the same industry.

Second, CEO compensation should be examined for abuse. Nothing is wrong with paying CEOs well, but to pay them exorbitantly may indicate an extremely flexible corporate governance culture.

Third, a CEO should have a conceptual framework that he or she can articulate well. Analysts should listen carefully to a CEO’s answers at public meetings or conference calls. Buffett also pays attention when CEOs forecast earnings. As he himself points out, “We are suspicious of those CEOs who regularly claim they do know the future — and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to ‘make the numbers’ will at some point be tempted to make up the numbers.”

Fourth, it is important to read the company chairman’s annual letters to the shareholders from several years. Investors should be suspicious of letters generally offering excuses for weak results. This may involve poor quality of management. In many of these letters, success is often attributed to management efforts, but failures are attributed to exogenous reasons.

Fifth, attending annual shareholder meetings is paramount. It gives a unique opportunity to evaluate the company’s managers by examining their responses to shareholder questions and to learn more about management attitude towards shareholders. It helps you build trust on management or not. Buffett and Munger have often emphasized the importance of trust and have mentioned that they would not invest in a company if they did not trust its management.

Last and probably overarching, a very high level of integrity among company employees and the CEO is important. Buffett wrote to the employees, “Lose money for the firm and I will understand it; lose a shred of reputation for the firm and I will be ruthless.”

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