MONEY

Investors need confidence in company's managers

Nancy Tengler
Special for the Republic | azcentral.com
Ethics, sound strategy and strong management are all key to business growth.

You may have heard the old adage: If you don't like company management, vote with your feet and sell the stock.

Benjamin Graham, author of the 1949 classic The Intelligent Investor, calls that attitude "fatuous and harmful," for it does nothing to improve bad management and merely shifts the problem to someone else. Graham was a believer that "investors make money not out of each other but out of … businesses."

In the daily hype surrounding the stock market, the purpose of owning stocks is often lost on the average investor. The prevailing sense that investing is gambling or sport (words such as "bet" or "play" when referring to investing make me cringe) is unfortunate. Investing is neither. When we buy shares in a company, we are buying the company's management team as well as a portion of the company's future earnings. This is our management team, and we are counting on them to execute a sound business strategy and robust earnings growth.

Because the nature of stock ownership is a little less tangible than say, real estate, it is even more imperative we have confidence in the management team. This past weekend, Barron's published its annual listing of the "World's Most Respected Companies." The survey polls professional investors, asking them to rank the world's largest 100 companies based on levels of respect inspired by the company's ethics, strategy, management, competitive strength and growth. Interestingly, ethical business practices ranked highest, well above revenue and profit growth. A sound business strategy came in second and strong management third. All of these characteristics go to strong management and are the very things we should be concerned with when seeking to become owners of a company through shares of its stock.

Consider the five companies that topped the list: Apple, Walt Disney, Berkshire Hathaway, Visa and Google. We might all agree these are excellent companies that boast iconic brands and in most cases celebrity CEOs. But celebrity CEOs alone do not ensure ethical, responsible management. Those who remember Enron's Jeffrey Skilling, Qwest Communications' Joseph Nacchio or Tyco CEO Dennis Kozlowski know that celebrity is not a fail-safe measure. We are instead looking for a combination of the characteristics of great management teams that produce outstanding companies and strong stock performance, the same characteristics expressed in the Barron's survey.

There is one more characteristic we will explore in future columns: the quality of the board of directors. Are the directors (for the most part) independent? Do they own the stock? Are they experienced business managers? The board should hold the company management (and celebrity CEOs) accountable. We rely on them but we cannot abdicate our responsibility to them. It is, after all, our hard-earned savings we are investing.

Nancy Tengler spent two decades as is a professional investor. She is an author, financial-news commentator and university professor. Reach Tengler at nancy.tengler@cox.net.