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Rupert Hargreaves
Rupert Hargreaves
Articles (304)  | Author's Website |

Traits of the Best Business Managers

Evaluating the quality of a company's leadership

July 11, 2017 | About:

I recently covered an old lecture from Warren Buffett (Trades, Portfolio) in which he discussed his process for searching out those businesses with the best economic moats -- an essential part of his investment success.

Finding those companies with the widest and deepest economic moats is an art, not a science. Business advantages such as patents, brand power and pricing power account for a significant percentage of what constitutes a moat, but there is one other factor that should always be considered when evaluating a company’s long-term potential.

Finding the best managers

Trying to find the best managers is another art, not a science. It is something Buffett has become extremely good at over the years. Many of his greatest deals have been done on a handshake and, in some cases, he has neglected to even view the business’ financials before making a deal as his belief and trust in management is so strong.

The average investor is never going to be able to conduct the same level of due diligence of management as Buffett, but that does not mean management should be ignored. Indeed, it is arguable that as a small investor it is imperative that you can trust management to act in the most prudent manner on your behalf as, unlike large investors, you are unable to kick up a fuss and replace the CEO if it emerges they have led the business down the wrong track.

Tracking down the best managers

Ian Cassel and Sean Iddings' book, "Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses," is devoted to this process of finding the best managers to look after your capital. The book profiles eight so-called intelligent fanatics who built dominant and enduring businesses that achieved huge returns for investors during the process. A $1,000 investment with each company grew to an estimated $3.4 million 37 years later, a compound annual return of 24.6%.

All of these businesses operated a wide array of industries on different continents and against various economic backdrops, but all managers had relatively similar leadership styles, strategies, corporate cultures and values.

While this book may appear to have many similarities to William Thorndike’s "The Outsiders," Iddings and Cassel explore the fortunes of different business managers who may not have been as successful as the outsiders, but still achieved above-average returns for investors. In comparison to oustider John Malone, fanatic Herb Kelleher, who founded Southwest Airlines (NYSE:LUV) and practically invented the low-cost airline model, may be considered insignificant, but considering he produced annual returns for shareholders of more than 20% during his tenure from 1971 to 2001, his success should not be overlooked.

So what key traits do these fanatics all have in common? First off, they all strived to build a customer-centric business. In every case, these fanatics designed the business with the customer in mind, breaking the mold and going to war with other companies in their sector. Thanks to this client-focused model, they were victorious.

One of the reasons all of these companies were able to put customers above everything else (and offer the best cost) was due to a simple business model. Corporate waste and excessive overheads were reduced. As long as customers were getting a fair service at a reasonable price, they did not seem to mind – a similar trait unifies the outsiders, particularly the likes of Buffett and Tom Murphy of Capital Cities, who famously painted only two sides of a building (the sides customers could see) to save money.

Keeping things simple

Simple operating structures and low costs often mean these fanatic-run companies have the best operating margins in the business, which gives them scope to invest more than peers, maintain their operating advantages and return more cash to investors.

Another trait these fanatics all have in common is their desire to reward employees appropriately, structuring pay packets to offer incentives that did not incentivize excessive risk-taking but at the same time compensated employees effectively for producing returns. There are two points to be made here. First of all, this kind of compensation structure may not be the most rewarding for employees, but it does ensure the business always remains on the right track (if incentives had been properly aligned with risk-taking in the run-up to the financial crisis, the subprime debacle might never have had happened). Second, treating employees fairly and ensuring they enjoy their place of work creates a beneficial culture that collaborates for the good of the business. Companies that have a good reputation among employees and are happy to talk about it (some companies mention how long their employees have been with the business in annual reports) will undoubtedly have a better culture, working environment and workforce who are driven to achieve the best for the company and all shareholders.

Conclusion

This is certainly not a comprehensive guide to what does or does not make a good business leader, but it does highlight some of the traits that tend to dominate companies run by the best managers. If you find a devoted manager, the chances of investment success are significantly increased.

Disclosure: The author owns no stock mentioned.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert was as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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