Fisher puts the weight of top management in the quality of an investment at around 90%. I see this as an exaggerated figure, as many companies can be managed by almost anyone, such as Coca Cola. Even exceptionally good management cannot work miracles if the company is in the wrong industry. Poor management can destroy any business if given the chance, so the ability of top management matters. A wrong assessment of management ability can lead to a wrong investment. At the time of investment, an investor using Fisher's fifteen points as a guide will likely have enough information about the abilities of top management, but assessing the successors of managers can be difficult. The departure of previous managers is the moment when an investor is most likely to make a wrong assessment of top management.
Top management can reward an investor in at least two ways. The first and less significant way is by significantly increasing the P/E ratio since the time of purchase. There are limits to the growth of the P/E ratio. A more significant way is the growth of the earnings per share received by the investor compared to the purchase price. With good management, the company grows its earnings much faster than the market average for a long time, which enables top returns. According to Fisher, few people on Wall Street in his time could justify the goodness of an investment by saying that “senior management has begun to demonstrate its ability to increase shareholder value without the market noticing.”
The CEO is the most important person in the company. He must strive to maximize shareholder value in the long term, not the short term. In addition, he must surround himself with competent people and give them areas of responsibility to handle without interfering in their actions. They must work together to achieve clearly defined goals without internal power struggles. One clue to whether a company revolves around the CEO is the salaries of other top executives. He should not have an unreasonable salary for the next managers in the pecking order. This is a warning sign for investors. Salaries should be reduced gradually.
Even the best members of the management team and teams have traits that are undesirable. The good traits of great management more than offset the bad ones. When an investor carefully examines a company, he can notice possible weaknesses in its management. Fisher listed four different weaknesses that are relatively easy to spot. They may not be the most important, but not requiring that much expertise from the investor to spot them.
The first sign of weakness that an investor may see is a company’s board of directors, which does not have enough people who are involved in the actual business. This is especially true of companies where the CEO also serves on the board. In this case, the CEO usually wants to be responsible for both managing the company’s actual operations and the board’s work. He either does not have enough faith in the other board members or believes that he is always right.
Another sign of weakness can be a member of senior management whose sole task is to grow the company’s business through mergers and acquisitions. Only a few mergers and acquisitions are profitable. The mindset of such individuals shifts to pursuing their own interests, because corporate restructuring is the only way to justify salary payments. Before long, corporate restructurings are done only for their own sake, without caring about the interests of shareholders.
The third sign of weakness is when one or more members are hired to the company's board of directors whose expertise is based on a narrow area of board work. In board work, each member must be able to view the business strategy and its implementation with sufficient judgment. Each member must be able to warn the top operational management when the company is not performing according to expectations or strategy. Seeking narrow expertise for the board indicates that something has been done or is being done wrong in that area, or that weaknesses are being addressed in the wrong way.
The fourth sign of weakness mostly affects smaller companies. When a company operates in too many separate business areas for its size, it is a sign of difficulties or that top management does not know what it is doing. Fighting on too many fronts means that resources are dispersed, which makes it difficult for a company to operate. A mixed bag of tricks rarely produces maximum returns in the long run.
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