Whether it’s dating, marriage, or job hunting, most people agree there’s value in getting to know someone before making a big commitment. That’s why a key pillar of our investment philosophy is finding wealth-creating companies that are also run by excellent management teams.
One reason we look for great managers is because they frequently surprise on the upside by extending growth runways and increasing business durability, which ultimately leads to greater value. People become critical to the equation over longer holding periods, and particularly for smaller companies that retain a large part of their earnings for reinvestment. The right people can make or break an investment case.
In my experience, excellent management teams are stewards of owner capital. They invest prudently for the long-term benefit of all stakeholders and are always seeking new ways to deepen their company’s competitive advantage. Some are customer-obsessed and entrepreneurial, while others are financial gurus. While their area of genius may differ, they all display exceptional talent and integrity.
As part of our process, we assess management constantly. Whether it’s when we look for new ideas, review existing holdings, or during scuttlebutt. For example, this year I spoke with 156 unique managers, which translates to one conversation every couple of days. Across the research platform, we have collectively conducted 5,270 management team interviews over the last five years. This broad coverage also means a repeatable framework is required to compare and contrast character traits. Some of the attributes we systematically rank across include: capital allocation, strategy, competence, execution, culture, risk management, team, and alignment.
In terms of interview best practices, I’ve found that it’s important to prepare thoroughly and then listen. Never underestimate the power of silence after simple pointed inquiry! Here is a collection of my favourite qualitative and empirical questions:
- How much time or money would be needed to copy your products or services?
- How loyal are customers, for example customer churn rates?
- What percentage of sales comes from segments where you hold a #1 or #2 position?
- What are the three most important financial and nonfinancial KPIs on your dashboard?
- What are some fatal mistakes you’ve seen peers in your industry make?
- How do you decide whether to build vs buy when expanding into new areas?
In business or one’s personal life, it’s hard to win without the right people on your side. A thoughtful approach for understanding how someone makes decisions is just one step towards enduring relationships.