4/24/2017

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Executive Traits a Critical Gauge of Investment Merit
Stephen T. McClellan, CFA,
Author of Full of Bull

 
Investors evaluate companies by gauging management effectiveness, quality, character, and values.  Surprisingly, executives, who have an inordinate influence on their stock price, often transmit the wrong signals and act improperly with their investors, the media, customers, and employees.  They fall prey to cheerleading and puffery.  They over-promote their stock, managing the stock instead of the company.  I was a securities analyst on Wall Street for 32 years, and this subject is so important to investors that in my book, Full of Bull, I devote an entire chapter entitled, “Executive Traits are a Revealing Investment Gauge.”

Candor, Access  Executives gain credibility by being forthright, freely discussing negative cross currents and challenges. Access is critical, management must be open, available, and responsive to Wall Street and investors as opposed to being evasive or secretive.

Humble, Genuine  Company leaders should not be arrogant—no attitude or egos, hype, or PR baloney. Firms in the Midwest, for example, seem to be more genuine. Warren Buffet comes to mind, schmoozes with the little guy, eats hamburgers with Bill Gates in the local diner, and speaks with brutal frankness.  Executives should willingly admit mistakes and alter course. No one’s perfect or invincible.

Trust, Quality, Class  Management must be honorable, their comments reliable, their actions straightforward. They should act with class, not be litigious, display no vindictiveness, do nothing shady or sleazy. Investors need to be able to trust executives to the core.

Hands on, in Touch  Executives should be aware of what’s occurring within the company at several levels and be in contact with the little people, not buffered by multiple management levels. Ross Perot was a master at this, chatting with his lowest-level associates in the elevator and in the cafeteria. John Chambers at Cisco engages all strata of employees.

Outgoing, Aggressive, Confident  I like to see these elements, and yes, they can co-exist with humility. Executives should not be shy, inward, or parochial. There needs to be a certain toughness, assertiveness, and conviction as long as there is the realization of vulnerability.

Old-Fashioned Business Values  Management should be long-term oriented, use no stopgap acts to boost immediate earnings, have a certain discipline, and avoid overpaying for acquisitions. They shouldn’t have sumptuous headquarters or ostentatious perks. They should care about low-level employees and small clients.

Conservative, Understated  Executives shouldn’t mix business with social styling and other over the top dress practice. Investors are bothered by flashy manners, extravagant events or meetings, and anything that substitutes superficial showmanship for substance.  Gold chain jewelry, monogrammed cuffs, overly chic designer shoes, or tony fashions are off-putting.


DON’Ts are Extensive and Subtle

There’s probably little dispute on the “DOs,” they’re fairly straightforward.  The list of “DON’Ts” is more extensive and subtle:  arrogance, flamboyance, trash-talking, stock price fixation, overindulging, to name a few.  Many times executives are not lying; they are just uninformed, naive, overly optimistic, or eternal low-ballers, taciturn, or shrewd storytellers.  When investors and the media notice undesirable traits they are immediately defensive and skeptical.

Investors are further disconcerted by executives appearing overly coiffed, with big rings, and fancy designer suits.  The same for corporate headquarters, nothing too posh, ornate, or lavish.  Making negative aspersions about competing companies and products, or Wall Street analysts who carry a negative view on your stock, is interpreted by investors as a cover-up for internal corporate inadequacies.  Management references to their stock price valuation is repulsive to investors, connoting a short-term executive mindset.  Executives should run the company to achieve financial goals and let the stock price follow along for the ride.

 
Executive Actions Under Pressure

When business issues arise and setbacks are incurred, investors closely observe management actions under pressure.  These are the times investors scrutinize executives to see if they take the proper, studied, rational, and calm course to rectify the situation.  This brings to mind more no-no’s like blind optimism.  In a crisis situation canards flow freely, executives can take an insouciant attitude, believing everything will turn out alright.  It’s called spin control.  The proper course of action with investors should be forthright candor, an evenhanded assessment, a willingness to detail the negative situation, an admission of the challenges, and all the while open access and responsiveness to investors.

Investors get nervous when they sense executive panic, or during difficult times when management behaves in a deleterious manner, making mistakes that compound the problem.  A common miscue in investor communications is assuming a current challenge is a passing, short-term situation, one or two quarter in duration.  Executives need to manage investor expectations by veering to the conservative, worst-case scenario.  Investors will gain confidence as the outlook improves, and will not feel misled by an ostrich-like management attitude if it takes a little longer to right the ship.

Executives should avoid blaming external, uncontrollable factors.  Investors perceive excuses such as the economy, foreign currency, irrational competitor pricing, or a rival “buying” a contract, as evasiveness to dodge culpability.  Take responsibility, take ownership.  Don’t blame non-operational factors, things like inferior forecasting, accounting or reporting systems.  As a long-time Street insider, I have even watched executives hold securities analysts and the press responsible when their stock price dives.

Never turn inward, wall off the company leaders, or become inaccessible when a storm hits.  Hiding from Wall Street, investors, and the press is a serious mistake.  It might be calm inside the firm when executives are conferring and contemplating resolutions to a sudden crisis, but be aware that it’s not just investors but also clients, suppliers, employees, lenders, government regulators, and other key stakeholders that are roiled, and in need of handholding.

 
Treat Street Analysts Impartially

During normal periods executives at publicly held companies have a tendency to give preferential, unequal access to Street analysts. Executive inducement of analysts via selected entrée is a pernicious practice.  It is easy to blacklist analysts who carry negative investment ratings by granting only the bullish analysts exclusive meetings with the CEO, invitations to user meetings, and headquarters visits. Enlightened companies treat all Street analysts impartially and in an evenhanded manner.  The natural response to a negative opinion is to retaliate by punishing the analyst, limiting access, not returning phone calls, or lambasting the analyst, making disparaging personal comments to discredit the unfavorable stock recommendation.  Such behavior is unbecoming.  A more magnanimous attitude toward Wall Street instills a long-term positive image.

Investors and Wall Street are constantly judging executive aptitude, appraising management prowess to determine a company’s prospects.  Little things mean a lot.  These factors are an important influence on the value of your company.

©2008 Stephen T. McClellan


Stephen T. McClellan CFA
, author of Full of Bull, is a former Wall Street investment analyst with 32 years of experience covering high-tech stocks. He spent 18 years as First VP at Merrill Lynch and eight years as VP at Salomon Brothers. McClellan has ranked on the Institutional Investor All-American Research Team for 19 straight years and on the Wall Street Journal Poll for seven years. He is in the Journal's Analysts Hall of Fame.

McClellan is former President of the Computer Industry Analyst Group and the Software/Services Analyst Group. He has been a guest on CBS, CNN, CNBC, and Wall $treet Week and has presented to many leading technology companies including IBM, Apple, ADP, and EDS. He is the author of the national best-seller The Coming Computer Industry Shakeout: Winners, Losers, and Survivors, and his work has also been published in The New York Times, Financial Times, Forbes, and other leading publications.

He holds an MBA in Finance from George Washington University and resides in San Francisco with his wife, Elizabeth Barlow, an artist.

McClellan's website is stephenmcclellan.com

 

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