‘Character is the firm and seasoned substance of the soul.’ Major General Joshua Chamberlain

Character Matters

Evaluating and measuring leadership if often viewed as the key to investing, speculating, wagering, and other areas related to financial outcomes (here is a nice article from Forbes about the different aspects of character). Academics research and write journals about the various measures of successful leadership. Business schools offer, and sometimes even mandate, a curriculum which studies different scenarios and case studies to learn from historical examples of great or poor business results. Practitioners can study the past to understand the different philosophies and theories about leadership, but there is nothing like real world experience to indoctrinate you as to the importance of those at the top. In that light, let’s take a look at few personal observations to see if we can learn more about this crucial area.

About twenty years ago, a company called Enron was placed on the cover of Fortune magazine as a top company in the energy industry. The CEO of the company had an impressive pedigree in that he was the head of the class at Harvard Business School. Another executive who ran the pipeline division was ignored by the leadership and ultimately left to start his own company. The divergent paths of the two men prove interesting. The CEO ultimately wound up bankrupting the company and wound up going to prison and the Chairman of the Board would also be indicted but wound up dying from a heart attack while learning about his fate. The ignored executive, Richard Kinder, wound up starting a company that would buy pipeline assets all over the United States which would result in Kinder Morgan, today a company with great assets. You are probably familiar with some of this story, so not much is new here, but let me mention a personal anecdote from last week at the LD Micro Conference (an invite only affair).

What is Good Character?

The LD Conference is held twice a year in Los Angeles and is put on by Chris Lashing, who does a wonderful job. Approximately three hundred companies present their company story and there are chances to have meetings with the leadership of these entities. The meetings are approximately twenty minutes long where investors ask questions about the specific business and its prospects. Prior to the conference, I researched all three hundred companies to be as efficient as possible with my time. I asked for meetings with three companies, all of which we own (clients, company, self), although not large positions. Two of the meetings went wonderfully, as expected. However, the other one was eye-opening.

Why? The company I refer to I find to be as interesting of a business as anywhere there is one. The enterprise is in a large market, has very unique products, is quite small, and has plenty of opportunity to grow the business into something much larger. My meeting was scheduled for first thing in the morning on the first day of the conference. All meetings are set up through the conference organizers and I assume the management agrees to the meetings before they are set up. I anticipated having a nice discussion with the CEO and the leadership about the business and its areas of focus. Lo and behold, I waited the full twenty minutes and the CEO did not show up. Whiffed. Disappointment.

Later that morning, lo and behold, at lunch, there he was, the missing CEO. I recognized him from the prior year, and of course, had to stop him. I politely asked him what happened to the meeting this morning? He shrugged his shoulders with no answer. This person is as highly educated as any CEO anywhere with degrees from Stanford and MIT. OK. I asked my questions, and he digested them with no answer. He quickly took another phone call and walked away. Later that night, I ran a friend at dinner to whom I mentioned the company. He sat in on the presentation by the CEO later that afternoon and was not impressed. What can we learn here about evaluating leadership? If a leader of a publicly traded company is scheduled to meet with an investor and does not take the time to show up for the meeting, or at least give advance notice that he won’t be able to make it, it says something about the attitude towards not only one investor, but all investors.

Investors work hard for their money, and clients work hard for their money as well. Placing capital into a company where you don’t have faith that the leadership will do what they say is a major mistake. One of the shiny objects you can get distracted about is the educational and work background of the leadership team. Pedigrees matter, but if you cannot trust people to do what they say, the pedigree is meaningless. Companies where we have had the most success is when the leadership does exactly what they say. As Chamberlain elegantly stated, character matters.

Searching for high quality leadership

It was a full week in the markets as Chairman Powell essentially said he is on hold for the foreseeable future as far as interest rates are concerned. Of course he is data-dependent, but wants to see inflation pick up a touch. Globally, the Brits decided to go against Labour’s Jeremy Corbyn in a big way. If you think Warren and Sanders are progressive, Corbyn makes them look mild. The always controversial AOC proclaimed her support for Corbyn the day before the important election. Nice to see that result as Corbyn has a long history of comments and behavior which is disturbing. Scotland also voted, but they want to stay in the EU, and the outcome there calls into question how solid the UK truly is. Many analysts believe England will leave the EU but Scotland may wind up outside of the current UK. More intrigue for sure.

On the earnings and economic front, the headliners were at the NASDAQ with Adobe, Oracle, and Costco all reporting on Thursday. If you want to see what causes stocks to pop or drop, just look at the results from Adobe and Oracle. Adobe grew revenues at 20% and net income at 25% year over year, while projecting the same thing next year. The stock jumped and has been a huge winner over the last decade. Oracle posted revenues increasing .54% (half of 1%) and net income increasing 12.5% year over year. The stock dropped a little, and although Oracle is ahead by 21% for the year, relative to Adobe or other faster growing software companies, it has been a laggard the last ten years.

One area of the market which has not performed at all over the last ten years is energy. In nearly any part of the energy market, you can find companies trading near their lows. The caveat, and there is always one isn’t there, is energy has been abysmal for the last decade. If you believe in reversion to the mean, might be worth a look. Of course, make sure you look at management and their, well, character.