The first time I met the late owner of the Daily Mirror, Robert Maxwell, I was a young analyst. I asked him a completely legitimate question about a problem in the accounts of one of his companies which disturbed me. He turned to me, glaring and growled, “I know your boss very well.”
The nature of the threat was as opaque as his accounts, but it was definitely a threat and meant to deter me from digging too deep. I recognized him as a bully and took that as a warning signal.
Meeting business leaders is one of the advantages a fund manager tends to have over the do-it-yourself investor. But the regulators don’t allow these managers to tell us anything in these meetings that they don’t tell everyone. So what is the benefit of this? Often you are looking for subtle signals.
I remember another young fund manager who came back from a company meeting once and told his boss he didn’t like the CEO. The boss replied, “I’m not asking you if you want to have dinner with him; I ask if he will save you money.
I love corporate meetings, but I have to be careful not to overdo my instincts because they can be wrong.
I met an entrepreneur whom I found quite charming. I loved it. But a few months later, my co-manager, Laura Foll, came back from a similar meeting complaining that she had been condescending and rude. It also sent a signal – if an older male manager is unable to treat women appropriately, is he overwhelmed? And what was the value of my initial judgment?
Markets are in a time of change. We have already seen teams subjected to extreme tests during the pandemic. Now, as we look on the other side of the crisis, we have supply chain issues, rising interest rates and inflation at its highest level in 30 years – not helped by events in Ukraine.
This is a time when strong management can make a significant difference in the way a business copes. If you’re looking for signals about the capabilities of a company’s leadership team, you don’t have to come across them in the flesh. So what should you be looking for?
We like managers with a high level of knowledge and understanding of the industry or sector in which the company operates. This is especially important in young and growing technology companies.
A good example is the team that runs one of our holdings, Illika, a producer of solid-state batteries. Graeme Purdy was chief executive for nearly 18 years and led the company through two rounds of venture capital funding. He previously ran a technology company in the Netherlands.
We have found that our most important positions in small businesses are led by people who have worked in the industry for many years. Another example would be Robert Forrester, who founded Vertu Motors in 2006. Today it is the fifth largest car retailer in the UK, employing 6,000 people. Before launching Vertu Forrester was chief financial officer and managing director at rival Reg Vardy.
Any change in direction makes us nervous, especially if we don’t see the need for a drastic change in direction. We are generally reassured by the internal promotion of experienced executives. Typically, it’s not foolproof, but if they’ve been with a company for a long time, not only do they know the industry, but they have an important understanding of the company’s culture. This can ease the management transition.
Regardless of their collective experience, a team will inevitably encounter unfamiliar situations during their tenure – a global pandemic, for example.
Few companies have been able to weather the coronavirus crisis and its effects without making changes. Most had to constantly adapt, and some had to completely reinvent themselves.
We’ve found that smaller companies tend to adapt more easily. One that did so so quickly during the pandemic was Oxford Nanopore, which used its gene sequencing technology to develop rapid diagnostics for Covid-19 and subsequently secured hardware sales in that region. .
Often, large companies find it more difficult to successfully engage in the dynamics of change, but some manage to do so. Rolls-Royce has undergone the biggest restructuring in its recent history in response to losses suffered from the pandemic. Faced with grounded planes and canceled orders, the company needed to cut costs and raise funds. This unfortunately resulted in layoffs, as well as the withdrawal of peripheral activities and the shortening of lines of communication from management.
Incredibly tough decisions and disciplines put in place in times of crisis mean Rolls-Royce now looks better placed for a resumption of aerospace activity. Look for evidence that management is able to adapt.
For me, one of the most important questions to ask is, “Did this team do what they said they would do? When we meet with management, we record and track what is discussed and predicted and will challenge any inconsistencies in future meetings.
Similarly, we review outlook statements, which are readily available to the public. These are extremely useful for comparing what was promised or planned with what actually happened.
During this process, we ask if there have been any significant disappointments within this team, recognizing that some losses may be beyond the company’s control.
Opening and deductible
Finally, we recognize that everyone makes mistakes. We don’t expect a completely faultless record, but we do look for honesty and timeliness when it comes to admitting mistakes.
We find that those who are most upfront about their missteps tend to rectify them more successfully than those who try to ignore or hide the issues.
An example is Dave Lewis at Tesco. He had to deal with an accounting scandal shortly after his appointment as general manager. He was a boss from outside, but from a relevant industry and from Unilever, a company with a strong culture of integrity. He apologized, won the trust of the City (and us, it’s a share we now own) and got the company on the other side of the crisis.
This compares to the Sackler family, who for years adamantly refused to accept blame for the aggressive marketing of painkillers that helped fuel the opioid crisis in the United States.
We have made mistakes ourselves, of course, but this approach to management evaluation has served us well.
Maxwell could have avoided my question while being extremely pleasant – the fact is he was unwilling to be open and honest. This is what dissuaded me from investing with him. The fact that he was a bully just made me less inclined to be in a room with him.
James Henderson is co-manager of the Henderson Opportunities Trust