Executives

Executives are the top-level managers of a corporation, the “C-suite” officers responsible for making the big decisions and steering the company. Think of them as the hired captains of the ship, with the most well-known roles being the Chief Executive Officer (CEO), Chief Financial Officer (CFO), and Chief Operating Officer (COO). Nominally, they work for the Shareholders—the company's true owners—and are overseen by the Board of Directors. Their primary job is to manage the company’s assets and operations in a way that creates sustainable, long-term value for those owners. From a Value Investing perspective, the quality and integrity of a company's executive team are not just footnotes; they are a critical piece of the investment puzzle. A brilliant business can be run into the ground by foolish or self-serving managers, while a mediocre business can become a spectacular investment under the guidance of a genius executive. Assessing the people in charge is as important as analyzing the balance sheet.

As an investor, you are essentially going into business with the management team. You're trusting them with your capital. The legendary investor Warren Buffett has often used the analogy of betting on the jockey (management) as much as the horse (the business). A great jockey on a great horse is a winning combination, but even a great horse can lose the race with an incompetent jockey. Therefore, your job is to determine if the executives are:

• Talented operators and capital allocators.
• Aligned with shareholder interests.
• Honest and transparent in their communications.

Finding a team that ticks all three boxes can be the difference between a frustrating investment and one that compounds your wealth for years to come.

Figuring out if an executive team is top-notch isn't an exact science, but you can find powerful clues by looking at their actions and words. You need to become a bit of a corporate detective.

This is the single most important skill of a CEO, yet it's often the most overlooked. Capital Allocation is simply the process of deciding what to do with the company’s profits. A CEO has five basic choices:

• Reinvest in the existing business (e.g., build a new factory, fund R&D).
• Acquire other companies (Mergers and Acquisitions).
• Pay down debt.
• Buy back company stock (Share Repurchases).
• Pay Dividends to shareholders.

A masterful executive treats company cash with the care they would their own, consistently directing it toward the option that promises the highest long-term return. A poor allocator might chase flashy, overpriced acquisitions or pour money into low-return projects just to grow the “empire.” A great way to learn about this is to read “The Outsiders” by William N. Thorndike, which profiles eight CEOs who excelled at this crucial task.

As the saying goes, “Show me the incentive and I will show you the outcome.” You must investigate how the executives are paid. This information is detailed in the company's annual Proxy Statement.

• Alignment: Does the Executive Compensation plan reward long-term value creation? Or does it incentivize hitting short-term targets, like quarterly Earnings Per Share (EPS), which can be easily manipulated? Look for rewards tied to multi-year growth in metrics like return on invested capital or free cash flow per share.
• Skin in the Game: Do the executives own a meaningful amount of stock that they purchased with their own money, rather than just receiving it as grants? When a CEO is a significant owner, their interests are naturally aligned with yours. They feel the pain of a falling stock price and rejoice in its rise, just like you do.
• Reasonableness: Is the pay package simply excessive? Outrageous salaries and bonuses that aren't tied to stellar performance are a huge red flag.

The best executives treat their shareholders as partners, communicating with candor and clarity. The primary channel for this is the CEO's annual letter to shareholders, found in the company's Annual Report.

• Read the Letter: Is it full of corporate jargon, buzzwords, and self-congratulation? Or does it speak plainly, openly admitting to mistakes and explaining the business logic behind key decisions? The gold standard is Warren Buffett's annual letter to Berkshire Hathaway shareholders, which is a masterclass in clear, honest communication.
• Look Beyond the Spin: Be wary of executives who lean heavily on “adjusted” or “pro-forma” earnings. While sometimes justified, these metrics can also be used to hide poor performance. For example, “Adjusted EBITDA” might conveniently exclude very real costs like stock-based compensation.

Keep an eye out for these warning signs, which could indicate a management team that is more focused on itself than its owners:

• A history of “diworsification”—acquiring a string of unrelated businesses that destroy value.
• An obsession with making Wall Street happy every quarter, often at the expense of long-term strategy.
• Frequent turnover in the C-suite, especially the departure of a CFO.
• Consistent and heavy selling of company stock by multiple top executives.
• Building a lavish new corporate headquarters or engaging in other ego-driven vanity projects.

Ultimately, when you buy a stock, you are delegating the management of your capital to the company's executives. Choose your partners wisely.