A quality management team should work for you.
Whenever you invest in a business you're effectively placing your cash in the hands of that company's management. Yet, it's hard to judge from a distance. Fortunately, Warren Buffett has written and spoken a great deal about what he expects of the management teams that run the companies he invests in.
Here are the essential qualities that he looks for...
Leadership accountability
In my opinion, leadership accountability is something Buffett expects from management.
It is clear from the tone of his annual letters to shareholders of Berkshire Hathaway that Buffett doesn't shirk responsibility for his own mistakes. Indeed, you can compare his upfront acknowledgement in his 2008 letter that he made mistakes with the annual reports of most companies, where the Chairman and CEO prefer to heap blame upon any number of extraneous factors, rather than take responsibility for their mistakes.
"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action."
His statement that "the CEO of any large financial organization must be the Chief Risk Officer as well" is also something you should ponder on the next time you read an annual report. Too often, like our leading politicians, they're too willing to dump the blame for errors of judgement on their subordinates.
Passion
In his 2001 letter Buffett made it clear management also needs a passion for the business they are in.
"We find it meaningful when an owner cares about whom he sells to. We like to do business with someone who loves his company. When this emotional attachment exists, it signals that important qualities will likely be found within the business: honest accounting, pride of product, respect for customers, and a loyal group of associates having a strong sense of direction. The reverse is apt to be true, also. If owners behave with little regard for their business and its people, their conduct will often contaminate attitudes and practices throughout the company."
Honesty
Honesty is an important characteristic that any good manager needs but which is lacking in far too many. Here is what Buffett said in his 1998 newsletter, regarding honest reporting. Although written over a decade ago, they still ring true today:
"In recent years, probity has eroded. Many major corporations still play things straight, but a significant and growing number of otherwise high-grade managers -- CEOs you would be happy to have as spouses for your children or as trustees under your will — have come to the view that it's okay to manipulate earnings to satisfy what they believe are Wall Street's desires. Indeed, many CEOs think this kind of manipulation is not only okay, but actually their duty."
Rational decision-making
One measure of management competence is how well they are able to think for themselves and resist the tendency, which we all exhibit to a greater or lesser extent, to copy the irrational behaviour of others.
A further test of management rationality is what they do with excess cash. If they can't find a way of generating good returns they should return the money to shareholders via dividends not waste it in speculative takeovers that destroy value.
Of course, it should also be remembered that good management alone doesn't make for a successful business. As Buffett has himself explained:
"When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that stays intact."
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