Author: Paul Curwell

Introduction

In any business transaction, understanding a prospective counterparty’s management team’s behaviors, evaluating their historical performance, and determining whether they are compatible as a future partner is critical to success. Whether undertaking Mergers & Acquisitions / Joint Ventures, selecting a business partner (such as a distributor, who you might partner with for years or even decades), suppliers who might be relied upon to provide a business-critical project, or making an investment as an external investor. These insights into a management team’s track record are typically incorporated into a broader program of due diligence, the needs of which will differ depending on circumstances or transaction-specific requirements.

Often, an assessment of management’s track record is performed by the prospective partner in an unstructured or informal manner, with business leads for the transaction going off ‘gut feel’ or perhaps spending time getting to know the other party to determine whether a partnership will work. However, in some cases, this is not feasible, or alternately an independent and unbiased view might be sought which is where business intelligence professionals play a key role. So what exactly is a management track record review anyway?

Elements of a Management Track Record review

There is no standard approach to assessing the track record of a management team, however there are common elements which will typically form part of any assessment. The scope of any review of management’s track record is really dependent on the context and questions that need to be answered by stakeholders. Common elements are outlined below:

a. Character and Personality Traits

Running a successful business takes more than being in the right place and the right time, it requires having the right team who are prepared to make decisions and sacrifices to achieve an objective. Understanding the personalities behind the management team is critical and often overlooked in favour of more quantitative metrics, however most readers will have encountered managers or peers who succeed and gain promotion through playing politics or riding on the backs of others rather than through any unique skills or attributes of their own.

Questions about an executive’s character that are considered within an assessment of management include:

• What type of personality are they? Methods such as Myers-Briggs Personality Type and Deloitte’s Business Chemistry can help provide answers
• What are their leadership qualities and style? How does this result in their success?
• How do they perform under pressure? What are their strengths and weaknesses? Do they ‘default’ to a common pattern of behaviour under particular conditions?
• What is their integrity like? Are they ethical and trustworthy? Will they behave in a socially-acceptable manner in the absence of scrutiny?
• What is employee engagement like? Do employees ‘rally behind’ and trust their leader (with all their innate faults as a human), or are employees disengaged and unmotivated to perform?
• Are they resilient? Leadership takes its toll personally on any leader, and they need to be in it for the long game, not for five minutes.
• What are their life goals? Do they align with where the organisation is going? Any mismatch may result in an unexpected departure which could affect business outcomes unless an adequate succession plan is in place.
• Are they driven to succeed? What drives them and is this sustainable?

In cases where you already have a strong relationship with the management team, such as the final stages of an acquisition or a few years into a business partnership, you may be in a position to bring in an organisational psychologist to help assess these traits. However this is often not possible in many situations, such as where a company is discretely scanning the market for a new distributor or acquisition. In many cases, the inputs to these assessments need to be gathered based on publicly available information – this is common practice in the intelligence community, where foreign leaders are regularly profiled to help anticipate likely decisions or pressure points.

b. Organisational Culture

The results of many studies show that culture is a key predictor of a company’s performance. Given that executives and the board set the ‘tone from the top’ in terms of behaviours and values for any organisation, part of any management track record assessment must consider the type of culture its leadership not just espouse through codes and comments, but what they actually do through their actions.

Gaining insights into culture requires speaking to current and former staff, customers, suppliers, regulators and even competitors to build a comprehensive picture of fact versus fiction.

c. Performance

A management team’s performance is comprised of many different factors, each of which are inter-related. While I am also a great believer that people make their own success and that some successes are partly the result of being in the ‘right place at the right time’, there are a number of traits which can help qualify a management team’s performance. These include:

• Have they demonstrated the ability to develop a viable strategy?
• Do they have a track record of executing on that strategy, and of successfully adapting that strategy to changing internal and external (market) contexts?
• Do they consistently deliver on promises and to meet expectations of customers, employees, and shareholders?
• Have they been able to consistently deliver positive results over time to demonstrate a track record of success, rather than benefiting from one-off ‘lucky’ guesses?
• Can you identify any lies or claims of exaggerated performance? Are you able to establish a pattern of slight, but regular exaggerations of fact?

Assessing performance elements of management’s track record involves understanding the performance of the organisation as a whole (or for large organisations, the relevant business unit), and the impact or effect of the management team on it. These factors are often most visible in cases where a highly successful management team resigns en-mass for a competitor or to pursue a new opportunity.

d. Competency and tenure

Whilst the tenure of a leader is relatively easy to identify and validate, competency can be much harder to assess. I’m sure we have all be in situations where we worked with someone we believed or understood to be highly competent, only to be let down or disappointed. Competence of management is more than just a reflection of their technical skill as a professional (e.g. accountant, lawyer, banker, engineer). The ability to lead, motivate and manage teams, engage the workforce, and effectively deploy the organisation’s resources must all be considered. This information often needs to collected via interview.

• How long did they spend in their various leadership roles? Anything less than a few years is likely to be a red flag
• Did they resign from an organisation shortly after receiving a promotion at an executive level? If yes, did the timing of their resignation coincide with an adverse event at the business (e.g. regulatory action, failure to hit earnings estimates) or occur shortly thereafter?
• Have they spent time in any ‘special projects’ type roles where they might have been grandfathered out of the business?
• What do people who have worked for them, and with them say about their abilities? Have they heard anything adverse on the grapevine? How do competitors view them?

e. Compensation

The last element of a management track record review we will consider here is the compensation of individuals. At the end of the day, most executives get paid to make decisions that results in the company growing and creating value for shareholders. Executive remuneration typically needs to provide a balance of short term (e.g. salary, bonuses) and long term (e.g. shares) to incentivise and reward desired behaviours. That said, a number of factors should be considered in relation to executive compensation and management’s track record:

• Does the management team’s compensation (or that of a specific individual) match the performance of the business as a whole? Also, how does this compensation align with industry benchmarks? If not, why not?
• What has the management team done with their stock options?
• Is the management team entitled to any sort of loan from the company?

In private (non-public) companies, it is often hard to obtain compensation data as this does not need to be disclosed, whilst in the case of partnerships partners often ‘cash out’ upon resigning from the partnership where they have equity. In these cases, other types of information may need to be used as a proxy to help gauge compensation arrangements.

When it comes to executive compensation, it is useful to remember the case of Enron where executives reportedly received a line of credit using company funds which they were able to draw upon each month, only to repay this loan with Enron stock which at that time did not require any reporting to the SEC, limiting transparency (Bean, pp.100-101).

Techniques for obtaining inputs to a review of management’s track record

Any review of management’s track record typically starts with desktop research. Reviews of company and industry documentation, public records, media articles, presentations / speeches, and similar information is always an excellent starting point. Often, a cursory desktop review can also help frame the scope and identify where to focus in relation to a second, more detailed exercise.

The next step to obtaining this information depends on whether the subjects know you are doing this (e.g. friendly acquisition or diligence on a prospective business partner) or whether this is unknown to the subject (e.g. early stages of proposed acquisition that has not been announced to the target). Situations where your interest is known to the subject is relatively straightforward – it becomes a case of collecting and analysing the information, and then presenting it to the subject(s) for comment. Where this work is not known to the subject at that time, the range of sources available to may be more limited.

After scoping and desktop research is complete, interviews with other parties such as suppliers, competitors, current / former employees etc can be undertaken to learn more about the management team and to corroborate key findings from desktop research. In some cases, it may be appropriate to do some sort of inspection or audit with their consent (e.g. compare the company’s performance against key events or dates), depending on the context. Obviously, care must be taken to avoid propagating any frivolous, vexatious or similar unsubstantiated claims that could give rise to a future defamation action, particularly when it comes to the specific actions (inactions) of an individual.

Once the information has been gathered, the exercise becomes an analytical one, where the goal is to build a picture using the information gathered and answer any ‘so what’ questions posed in the scope. Reviews of management’s track record are typically documented in a report which can then be used by decision makers as part of any planning. Importantly, the goal of any management track record is not to create a catalog of an executives weaknesses – noting that fraudulent claims should be identified and treated appropriately – however, for all other cases the goal is to help make an informed decision about whether the businesses involved are likely to be compatible. Where opportunities for improvement are identified with a compatible organisation, these learnings can be used to help inform plans for improvement.

Further Reading

• Bean, E. J. (2018). Financial Exposure: Carl Levin’s Senate Investigations into Finance and Tax Abuse, Palgrave Macmillan, Switzerland.
• Burns, C. (2019). Investment tips: How to assess management before buying shares, Australian Financial Review, 12 February 2019.
• Fahey, L. (1999). Competitors: outwitting, outmaneuvering, and outperforming, John Wiley and Sons Inc, Canada.
• Golis, C. (1998). Enterprise and Venture Capital: A business builder’s and investor’s handbook, Allen & Unwin, 3rd Edition, Sydney.
• Gladstone, D. and Gladstone, L. (2004). Venture Capital Investing: The complete handbook for investing in private businesses for outstanding profiles, Financial Times Prentice Hall, New Jersey.
• Hetherington, C. (2010). Business Background Investigations: Tools and techniques for solution driven due diligence, 2nd Edition, Facts on Demand Press, USA.
• Investopedia Staff (2020). Factors to consider when evaluating company management, Investopedia, 29 January 2020
• Kwek Ping Yong (2013). Due Diligence in China: Beyond the checklists, John Wiley & Sons Pte Ltd, Singapore
• Pontefract, D. (2017). If culture comes first, performance will follow, Forbes Magazine, 25 May 2017, www.forbes.com
• Stott, C. (2015). 5 factors to look for when assessing management, FirstLinks Morningstar, 3 December 2015, Australia.

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