Ammon D. Spiller and Dr. Timothy Gardner, Organizational Leadership and Strategy
With fraud and public distrust slashing companies’ value on the stock market, more American investors are relying less on financial data and more on the non- financial aspects of possible investments when making investment decisions. “Quality of management” has floated to the top as one the most important non- financial criterion used by today’s investment firms to evaluate a company’s value. Despite the wealth of research emphasizing the effect the quality of management has on investor confidence and stock price, little or no research makes the effort to define exactly what “quality of management” means. The goal of my research is to find out how investors define and measure the quality of management.
At the onset of my research I discovered that one possible reason little existing research attempts to define “quality of management” is because there are no clear answers. When conducting surveys I realized how difficult primary-source research is for developing a definition about an idea like “management quality” that most investors consider abstract. For example, a survey question almost every expert I interviewed declined to answer was “How would you define ‘quality’ when describing management?” The question was considered to be too broad, despite the fact quality of management is real criterion used on Wall Street. With limited response to opinion-based questions on my surveys, my primary research relies heavily on answers to the few short-answer questions and quantitative questions. To compensate for my lack of primary research I relied more heavily on current research conducted by Harvard Business School professors.
An additional obstacle in conducting primary research on this subject is that many investors do not pick one company, but invest in mutual funds. Also, many investors feel that making decisions based on management quality is subconscious, resulting from bad press, hearsay, and other input that is hard to recall and quantify.
Although in most surveys investors refused to define “quality of management” most named the top attributes exhibited by quality management and ranked on a scale of one to ten how important quality of management is for investment decisions. When listing attributes of quality management, the most common were “integrity” and “competence.” The average rank for how important management is when choosing a company to invest in was three (one being the most important). Given the high ranking, quality of management is important to investors, despite the fact that the same investors can’t exactly define it.
To make my research more practical I used others’ research to help define the two attributes, integrity and competence, most cited in the surveys. Also, from the same articles describing quality management I compiled ways in which investors can look for evidence of the two desired characteristics. Thus, the scope of my proposed research has been narrowed to describe how investors define the two most frequently-mentioned attributes of quality management and how evidence of these attributes can be found.
Integrity has recently surfaced as one of the most important characteristics of good management because investors who used to focus too much on technical proficiency and too little on character have been burned in the recent stock crashes. Integrity, although an abstract concept, is most often described to interested investors as a willingness to take responsibility. 1 Examples include Johnson & Johnson and how the company successfully dealt with the Tylenol poisoning crisis or how Procter & Gamble withdrew Rely Tampons, a newly launched product, because of an unproved but potentially serious health risk. Each company’s management took more responsibility than many investors deemed necessary, but in retrospect, taking too much responsibility was the right move. In contrast is the recent disaster with accounting firm Arthur Anderson. Had Anderson management took more responsibility for the poor quality of the Enron audit, the company may still exist. However, Anderson decided to take as little responsibility as possible by shredding internal documents—as a result, investors and government regulators lost trust in Anderson and the company soon filed for bankruptcy.
Investors can measure management integrity by reviewing how management handled past crisis, blunders, or lawsuits. If the company has a habit of deferring responsibility to someone else, the company may not have the quality of management investors seek. Akin to taking responsibility in the public eye is taking responsibility when dealing with coworkers. When employees refer to the integrity of their management they often cite management’s history of keeping promises2. From office perks to promotions, quality management keeps promises to employees. However, this is a harder aspect of integrity for outside investors to measure.
Competence as a management quality is often described as the ability to motivate employees and communicate the company strategy. 3 In other words the “soft” side of management, the human relationships, can’t be ignored. Although mainstream investors rely almost exclusively on quantitative measures, for quality of management to be a reliable measure of success, employee satisfaction and motivation must be considered. Also, quality managers have a clear strategy that is easily communicated to new hires. Investors can easily measure the clarity of a company’s strategy by reading the corporate mission statement and underlining strategies mentioned in letters to shareholders. If an outside investor can’t distinguish where the company is headed than management and employees probably have a hard time as well4.
In conclusion, investors should investigate the quality of a company’s management to make a sound investment decision. A history of responsibility and a clear mission statement are evidence of the integrity and competence that define a top quality management that is worth investing in.
References
- Teal, Thomas. “The Hu man Side of Management” Harvard Business Review, Nov/Dec 1996, p35-44
- Sull, Donald N. “Managing by Commitments” Harvard Business Review, June 2003, p82-92
- Nohria, Nitin; Joyce, William; Roberson, Bruce. “What Really Works” Harvard Business Review, July 2003, p42-53
- Ittner, Christopher D.; Larcker, David F. “Coming Up Short on Nonfinancial Performance Measurement” Harvard Business Review, Nov 2003, p88-96