Management’s Communication Style

“The great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.” – Ralph Waldo Emerson

In our most recent article, we discussed competitive moats as a critical element of our investment process. An equally complex and arguably more nuanced area of business analysis involves assessment of management and corporate culture. We will devote several future updates to this topic but today we will explore the manner in which executives of public companies communicate with investors and whether their communication style can tell us anything about business performance.

Often, management teams of large public companies benchmark their performance to that of their industry peers instead of focusing on maximizing value for customers. For example, in its annual reports, one consumer company describes its main goal as “total shareholder return in the top third of the peer group”, effectively setting a performance ceiling. Another company talks of its “relentless focus on growth” to keep up with peers. While on the surface the growth goal may sound admirable, companies often achieve it by pursuing questionable acquisitions or investments in product categories that offer limited incremental value to customers. We think favorably of those management teams that instead use their corporate publications to tell us about the ways they delight their customers.

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Another way to ascertain management teams’ priorities is to gauge the degree to which executives care about Wall Street earnings estimates. The reality is that many executive compensation packages depend on short-term stock performance. Beating Wall Street estimates is a way to artificially boost short-term stock prices. For example, a CEO of a company we evaluated not long ago frequently compared its quarterly earnings per share numbers with Wall Street estimates. What’s more, he did it in official company press releases. Seeing this language in company publications prompted us to move on to other opportunities.

The effort corporate executives expend to interact with analysts and the media can also tell us about management’s priorities. A typical corporate CEO spends a significant amount of time attending Wall Street conferences to tout corporate performance. Some CEOs appear on business TV multiple times a quarter to comment on their quarterly earnings. Studies, including the recent work by Michael Mauboussin and William Thorndike (as well as our own experience), have shown that companies led by unconventional, independently-minded managers tend to meaningfully outperform their peers over long periods of time. Accordingly, we prefer those lesser-known CEOs who are busy leading their teams and delivering value to their customers while paying no attention to the whims of Wall Street and the media.