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Thursday, 28 February 2013

Judging The Quality Of Executive Management

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Financial analysts were among the first to express interest in a rating system for the quality of a public company's senior executive management. Governance observers and activist shareholders won't be the last.

As free-market influence continues to shift from institutions to individuals and from manufacturers to end-user consumers, investors and market watchers are tracking executive leadership as never before. After all, in such volatile economic times, everyone's looking for an edge, and everyone's looking for the team of business leaders with all the right stuff to create long-term value.

It's easy to spot the problems. Whether they take the form of a Chief Executive Officer with an incredibly lopsided compensation package, a business leader who has clearly stayed on too long or a dysfunctional Board that can't ever seem to get the critical business of CEO succession done right, it's easy to spot the leaders and teams that no long-term investor should bank his or her future on.

Yet selecting the right management teams to invest in remains a challenge. That is, unless you boil down the criteria for measuring "quality of management" to one of its most essential elements.

Consider the views of business management writer Tom Peters and American consumer advocate and former presidential candidate Ralph Nader - yes, an odd pairing but one grounded in common views of what companies should produce in addition to products, services and profits.

A quote attributed to Peters goes: "Leaders don't create followers; they create more leaders." And to Nader: "The function of leadership is to produce more leaders, not more followers."

Many people will tell you that it's not difficult to find a Chief Executive Officer who says one thing and does the other. Just read the business headlines in any media on a given day and that statement may be readily reinforced.

The real test - and no small concern for the long-term investor - is whether the Chief Executive Officer of any going business concern has surrounded himself or herself with an exceptional management team. Alas, the strength and performance of a high-performing senior management team is one critical demonstration of organisational potential, and an exhibit telling whether the CEO is both humble and smart enough to realise that the caliber of the people around them will dictate success or failure.

Just as the business leader must carefully choose who is up to the test, so too, should global investors dig down and do their own due diligence on whether enterprise sustainability and competitiveness can rely on superb management bench strength.
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