Allow me to flip the question, as Charlie Munger often did: what are the flaws or defects we would not want our leaders to possess?
Here are what I consider the worst faults in a business leader, ones that should be avoided at all costs before investing in a company. After all, it’s worth remembering that an investor should approach a publicly traded company the same way they would a private one. Would you want one or more partners in a private company to possess such flaws?
Lack of Integrity
Conflicts of interest are ubiquitous in the business world. A dishonest leader or one who disregards the other shareholders of the company they run can easily find themselves in a conflicting situation. For example, some leaders rent buildings to the company they manage or provide services to that company through other entities they own. These examples are numerous and fairly common for anyone who takes the time to investigate such conflicts.
Another situation involves what is called “moral hazard,” where a leader is incentivized to take more risks because they know others will bear the consequences. For instance, some leaders are primarily compensated through stock options. These options are exercised only if the stock price rises significantly; otherwise, the leader does not exercise them and has not spent a dime.
Other leaders think solely about personal enrichment, often at the expense of other shareholders, whether through exorbitant salaries or bonuses that are relatively easy to achieve.
Lying or Cheating
When a leader’s financial interests are not aligned with those of the owners, the temptation to inflate the short-term value of a stock by embellishing its prospects can be strong. A few months ago, we sold our shares in a small U.S. company because we believed its leaders were inflating current profits by adopting aggressive assumptions in preparing its financial statements.
Blind Confidence in One’s Own Abilities
Some leaders have experienced success throughout their lives. It can then be easy to overestimate one’s abilities and believe that mistakes are impossible. Overconfidence is a bias that affects many stock market investors, but it can also impact business leaders who think they are infallible.
Nepotism and Cronyism
The last thing we want from the leaders of our companies is for them to appoint team members based on family ties or friendships. On the contrary, we favor meritocracy, where appointments are given to the most deserving individuals.
An Autocratic Management Style
A leader who overestimates their abilities might tend to make all the important strategic decisions for the company and rely on no one else within the organization. If they surround themselves with capable executives to help in decision-making, these will only be individuals who think like them or merely approve their choices.
The Opposite of These Faults: Warren Buffett and Berkshire Hathaway
The antithesis of all these flaws is likely Warren Buffett and Berkshire Hathaway. His communications with the company’s shareholders have always been transparent and honest, highlighting both successes and failures, as well as growth potential and risks. His salary is very reasonable. Furthermore, he has always held a significant number of shares in the company, thereby aligning his personal interests with those of his shareholders.
Moreover, Berkshire Hathaway’s business model has always been based on decentralization of activities and decisions. Buffett rarely intervenes in the decisions of the numerous companies that make up the conglomerate, focusing primarily on allocating the company’s free cash flows.
Finally, Buffett has repeatedly demonstrated his willingness to question himself, admit his mistakes, and, above all, learn from them to avoid repeating them.
Upcoming Event
I will be attending the Salon du Livre in Montreal, which will take place from November 27 to December 1. I will be signing my book, Avantage Bourse (soon to be available in English) at Transcontinental’s booth (#1041) during the following times:
- Thursday and Friday, November 28 and 29, from 5:00 PM to 6:00 PM
- Saturday and Sunday, November 30 and December 1, from 12:00 PM to 1:00 PM
I hope to see you there!
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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