PROJECTING MANAGEMENT CAPABILITY

The two most important intangible factors of a company that must be judged by analysts are its management and its plans. There are in American industry today many large companies that began as small companies. There are also many small companies—and many that no longer exist—that were started at the same time as companies that are currently large. One difference between two companies that started small, and of which only one thrived, is capitalization. The other and major difference is management, which, given management’s role in raising capital, may in some measure be the same thing.

A study by the University of Iceland found that about 40% of the difference in the herring catch among the 200-boat fleet depended upon the captain. A look at hundreds of top companies in the U.S. and Canada showed that the personality of the CEO made as much as a 15% to 25% difference in profitability.

Management is less exact a science than long-range weather forecasting, and probably more arcane, mercurial, and convoluted. Judging management talent and skills can be difficult, not only because they’re intangible, but because they’re highly subjective. The elements of management may be definable, and with computer modeling, the science of divining those elements is undoubtedly improving. What is not definable is the way the configuration of those elements will function in terms of results. And as business grows in intricacy, so too do the demands on management become more complex, and so too does analyzing and assessing management become more speculative. Ultimately, and despite what they say in business schools and books, successful management is a function of skill, talent, personality, and luck.

Part of the problem of fathoming management, most analysts are finding, is that successful management can no longer be judged by traditional standards. The world moves more quickly than ever before, and using traditional methods of judging the skills of management is much like compar- ing the techniques of flying a single-engine prop plane to flying a jet in combat. The old skills are no longer any good in a world in which competition is international, the sources of capital are multifarious, technology changes the environment radically on a moment’s notice, and the skills needed to run a company and to compete successfully include those that didn’t exist a decade ago. And all this must be communicated to people who must make investment decisions based on information that travels with the speed of light. Success in investor relations, then, becomes more than a simple communications function—it becomes an art form.

The broad definition of management is the subject of a full library of theories, many of which conflict and none of which is definitive. What is important in investor relations is the ability to project to investors, believably, a corporate management’s ability to manage its company, to cause it to thrive and to grow, and to survive, in both good and bad times. What’s crucial to project is management’s ability to create shareholder value. Management theories abound, and continue to proliferate. But for the most part, complex management theories obfuscate, rather than help, security analysis. Essentially, the different theories are simply different routes to the same goal—increasing shareholder values. Whether the company is run from the top down, in the traditional model, or by a creative team, which seems to be the model in many high tech companies that require vast input from many people, the goal is still the same. And so too is the need to judge management’s ability to meet that goal.

A person who invents a cure for the common cold may be a thoroughly bad manager in terms of marketing, production, or finance. The entrepreneur who invents a useful and valuable item in his garage may be capable of managing the company he develops with his invention until sales reach a level of $30 million a year. As his or her company continues to grow, the shape of the company alters, production needs change, and so, then, do administrative needs. Team strength should be developing. A company in transition is at its most vulnerable point. The entrepreneur who is capable of building it to $50 million may not have the capabilities to build it to $100 million. The management team of a one-product company that decides to expand its product line or to diversify suddenly faces new and generally unfamiliar problems and may not be able to cope. Again, team strength emerges, as a topic increasing in importance.

A good management team must have a grasp of a great many things— finance, marketing, administration, production, distribution, the economy in general and its industry in particular. And even within the context of these elements, abilities are limited and alter with changing conditions. And again, never underestimate the value of personality and luck.

Perception, in looking at a company, is often very different from reality. The problem is that too often, the facts don’t count—it’s what people perceive to be the facts on which they make judgments. This puts a particular burden on the company, and a profound responsibility on the investor relations practitioner.

In projecting management capability, three views must be defined:

• The chief executive officer’s talents, personal characteristics and Leadership

• The capabilities of each key member of the management group

• The team of managers itself . . . its interaction and effectiveness as a team