At MIAM, we believe that people run businesses, so much so that it is one of the six pillars of our investment philosophy. After all, people are the medium through which the productive assets of a business are utilized to generate value for equity holders or the cash flow necessary to repay debt obligations. And sometimes the people themselves are the productive assets (for example, Gulf Island Fabrication Inc.’s (GIFI) services division and Heidrick and Struggles International, Inc.’s (HSII) consultants). Accordingly, we deploy our internal resources to thoroughly evaluate company management for each investment that we make.
At the core of our research process is a thoughtful review and analysis of a company’s fundamentals, which necessarily includes its people. We have previously described our calls with management and how we use information gathered through those calls to evaluate the state of the company as a whole. However, equally as important during those calls is our evaluation of management itself.
Our evaluation of management begins during the new idea generation phase of our research process. On our screening forms for each new idea, we include a detailed description of members of senior management as well as the board of directors. Each member of management’s employment history, public company experience, relevant educational background, technical expertise, and insider ownership are noted and considered. Occasionally, we will encounter members of management that we are familiar with from past investments and are able to bring first-hand knowledge of their capabilities to the investment currently being considered.
Without divulging every bit of how the sausage is made, there are two key characteristics that we look for when we initially evaluate company management. First is that they have an economic interest in the business. We put our personal capital in the same companies as our clients and we expect company management to do the same with the companies they manage. While we tend to avoid entrenched owner-operators with outsized ownership positions, a sufficient economic interest aligns management’s goals with creating value for shareholders. The second key characteristic that we seek is management that has a demonstrable track record of prudently allocating capital. Because we are long-term investors, management’s capital allocation decisions across multiple cycles are important. While we don’t dispute that management teams new to operating a public company can succeed, management with observable past decision making is preferred because it reduces (but does not eliminate) the amount of uncertainty associated with company management. Ultimately, we characterize a lack of information as risk and work diligently as a research team to eliminate as much risk as possible. Here, that manifests itself through our thorough evaluation of management prior to making the decision to invest in a company
We certainly have other characteristics that we consider when evaluating company management (such as board composition and key-personnel succession planning), but we’re passionate about each individual topic and have spent many hours debating over them internally, so we’ll save those discussions for a later note or for an in-depth one-on-one conversation with our clients.
As always, please reach out to MIAM if you are interested in partnering or would like to discuss a particular company or idea.
The MIAM Research Team
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