Capital Stewardship: from Clients to Portfolio Managers to Executives

No matter the position within the value chain, we are always outsourcing capital allocation in some instance. In this way, looking for outstanding capital stewards is of top priority for funds' clients (looking for great funds), portfolio managers (looking for great companies) and executives (looking for great projects).

In this paper, it's argued that no matter the insider ownership, one must analyze and trace the profile of key people. Stating the obvious: no matter if the key executive has 90% ownership in a company if he's a gambler who loves leverage willing to bet his entire fortune in one eccentric new segment. Right?

Analyzing people, their behaviors and habits, their principles and goals, their formal and informal incentives, is of main importance. We must remember businesses are run by people, so let's put "number crushing" a little aside.

Is the corporate culture appropriate? Is a repeatable mechanism entrenched in employees routine? Are leaders' personal goals aligned with the company's formal strategy? Which are the perverse incentives in place? What are the executives/board members' personal agenda main items? Do they conflict with the company's path? How?

Can you think of more questions?

Food for thought.

Henry Singleton, Outstanding Capital Allocator

I first heard of Henry Singleton, CEO of Teledyne by reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational  Blueprint for Success, which shares the stories of great capital allocators of all times. Then, I received this presentation about him presented by Leon Cooperman from Omega Advisors in the Value Investing Congress of 2007.

Singleton was able to buy over 100 companies in the "Conglomerate Era" and then, in the '80s, reaped the benefit of shrinking the total share count from 40 million to 12 million shares, without using debt, at low multiples.

His entire strategy used very little debt, with return on assets being very close to return on equity (ten-year ROA of  18,1% versus ten-year ROE of 19,3%). Despite not being a MBA student, he taught us a outstanding class on financial engineering.