6-08 Management

A company can have the best product on the market, tons of cash in the bank, and a huge well of talented staff, and all the customer loyalty in the world – but that can all disappear in a flash with poor management at the top of the company. Likewise, a company with an energetic, public-facing CEO can attract much more attention to the business and their products – effectively generating as much publicity as their entire marketing department.

Leading vs Directing

The top management of most companies will fall on a spectrum between “Leaders” and “Directors”.

Leadership

Leaders strive to inspire their company to greatness. Leaders want to always take initiative both in the marketplace by trying out new game-changing strategies that they have an active role in planning, and in the company itself by trying to inspire their teams to be the best they can be.

A “Leader” usually likes to get media attention to highlight how innovative and cutting-edge their company is and create a public consciousness that their company (and usually they themselves) are the best. A “True Leader” really can inspire their company to greatness by attracting top talent to their team and constantly driving the company forward. However, a “True Leader” can also drive the company straight into the ground by championing less-wise strategies, and “shaking things up” in ways that end up alienating dedicated parts of their company and consumer base.

Directing

Directors focus more on the nuts and bolts of running the business. They focus less on the spotlight, and more on making sure the actual operations of their organizations are the best they can be. A strong Director focuses more on making sure they have the right team and actively seek those people out, and actively delegate responsibilities to a team they trust.

A “Director” might still get media attention – especially if things are going well or poorly – but they will usually stay out of the limelight. Directors are more likely to take a collaborative approach in building the overall strategy of the company. This tends to be more stable, but it also can discourage fast-moving innovation.

How Things Go Wrong With Management

Leaders and Directors can create their own types of problems in a company too – directly impacting shareholders.

Leadership Problems

Leaders can say or do dumb things – and since they are more likely to already have media attention, everyone knows about it right away. They tie the value of the company to themselves at a personal level, so their personal actions and character send ripples into the stock price.

Leaders pride themselves on being drivers of change – if they change in a bad direction, it can cause big problems fast. When shareholders start getting fed up with leadership, a company with a “Strong Leader” is more likely to just have the CEO fired and replaced.

Directorship Problems

A poor director is less likely to cause immediate waves in the stock market, but is more likely to cause problems with general “mismanagement”. If the team they built does not work well together, it leads to long-term dysfunction in the company. If they are not able to pull up the innovation and game-changing ideas from the rest of their company, they risk having faster-moving companies outcompete them in the marketplace.

When things start going poorly in a company with a “Directorial” leader, you can expect many of the lower-level management to start getting fired before it works its way up to the CEO him or herself.

What To Look For As An Investor

As an investor, the kind of leadership you want to see is based on the kind of company you are investing in. If you are looking at high-growth stocks that are making a clear attempt at disrupting their industry, you will probably be looking for companies with strong Leaders that can pivot easily – but avoiding companies that have Leadership that keep ending up in the news for all the wrong reasons.

If you are focused on consistent returns and longer stability, you will probably want to focus on companies with management that skews towards the Director side of things.