Often times on the news, you may hear the names of famous CEOs like Tim Cook, Warren Buffett and Bob Iger. Why are they discussed so often? What separates them from their peers? Besides being at the helm of some of the most well-known and companies in the world, these CEOs, among many others have done a very good job of creating value for shareholders. How did these CEOs do such a wonderful job of creating value?
The key to it all is capital allocation, or, how management spends its financial resources. Management teams have many different options at their disposal; they can sell assets, make capital investments, make an acquisition, buyback their own shares and/or pay a dividend. Some of the best company leaders have a certain temperament when it comes to these decisions. They are rational and do not let their emotions get the best of them. They do not make decisions for short term gains at the expense of long term goals.
We try to stay away from CEOs who we feel show “hubris” or a falsely high sense of self-confidence. It is important to examine how management is compensated; is their salary reasonable based upon their performance? Are their stock options reasonable? Are their corporate offices too lavish? Is their compensation based upon short term goals?
Rational CEOs make timely acquisitions and rarely overpay for them. They do not spend capital on unnecessary or excessive perks, and they buy back stock when their shares are trading cheaply and they are willing to part with an asset at the right price. They exhibit humility, honesty and a willingness to work with others.
These are just a few examples of what Carnegie looks for in a management team when evaluating a company. When putting client capital to work, we look for ethical managers whose number one goal is creating long term value for shareholders.
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