When investors evaluate a company, quantitative measures, like profit growth or how one dividend compares to another, typically come to mind.
But a qualitative intangible, such as how good a company's management is, is harder to assess. So we asked four financial experts what they look for, along with their top picks for the best-run companies.
Trip Miller, managing partner at Gullane Capital Partners, believes management's compensation should be tied to company performance. Another good sign: executives buying shares with their own cash, as well as the company doing so.
"We like to see management teams that have a lot of skin in the game," he says.
In addition, how the top brass manages the balance sheet to increase free cash flow, as well as qualitative measures, such as whether C-suite members worked their way up within the company or were all-stars at other firms, also matters, he says.
Good managers know that every recipe for success is different, says Kevin Quigg, chief strategist with ACSI Funds. He believes CEOs should home in on improving a company's top two or three weaknesses, not chase after a multitude of fixes.
Renny Ponvert, CEO of Management CV, notes that top management's effect is more pronounced at smaller companies. How bonuses and incentives are connected to a small company's performance is also clearer. At larger firms, whether certain outcomes are because of leadership or general industry momentum can be harder to determine, he says.
Ponvert's company also considers management track records, its capital allocation practices, how well compensation is aligned with shareholder interests, management equity ownership and potential fiduciary risks.
"Ultimately the company's long-term sustainability is based on its people," says ARK Investment Management analyst James Wang.
With those measures in mind, our experts say these 10 companies stand out for having superior management.
Alaska Air Group (ALK). It's easy for airline managers to look good when low oil prices help boost bottom lines, but Alaska Air would stand out anyway, Ponvert says. Its CEO has been smart about allocating capital, adds Ponvert, noting the carrier's merger with Virgin America. "ALK's culture is one of fierce operational competitiveness (89 percent on-time flights), and it is based on a deep financial acumen of cost structure and efficiency," reads a Management CV note about the company from October.
Mueller Water Products (MWA). This water infrastructure business has room to expand, which is why Ponvert likes it: "It's a classic secular growth play." Plus, management made a good decision with a divestiture that allows the company to focus on its core water infrastructure clients, he says.
Micron Technology (MU). Because it's one of the principal commodity chip companies, Micron is a play on the broad technology sector. "We think it might be a better way to play all the elements of the technology industry," such as the internet of things, Ponvert says. Unlike other technology companies, Micron doesn't have the same risk of its shares being overvalued, he adds. Micron also has capable hands at the helm. Renowned engineer and co-founder of SanDisk Sanjay Mehrotra has such an illustrious resume that "the board was compelled to choose the first outsider ever to lead the company," reports a recent Management CV note.
Facebook (FB). Signs of success surround this social media company. Its stock price, revenue and user base all grew strongly in part because Facebook appeals to a broader swath of internet users than Twitter (TWTR), Pinterest or Snapchat, Wang says. But the company has also been smart about acquiring businesses as well as recruiting and retaining talent. Wang also credits CEO Mark Zuckerberg for ginning up near-term revenue prospects with a push into TV-like content. Longer term, revenue should benefit from plans to spur growth at Facebook's Instagram and WhatsApp acquisitions, and to incorporate artificial intelligence and virtual and augmented reality into the company's offerings.
Costco Wholesale Corp. (COST). Quigg likes Costco because management has stuck to its mission of buying more for less and passing those savings on to customers. "They understand that concept of perceived value," he says. That perception may be why Costco could raise its membership fee without deterring shoppers.
Amazon.com (AMZN). The online retailing giant excels for the same reasons Costco does – because of its efforts to increase the customer's perception of value. By diversifying its products, management built a bigger buffer zone for error, Quigg says, and plowing profits back into the business is helping Amazon develop drone delivery. "They invest heavily in their customer experience," he says.
T-Mobile US (PCS, TMUS). This company's management made a smart choice by delivering the two things people want most in a mobile carrier – low price and flexibility. "There's a thousand things they could have done," such as building more towers, but the company was right to prioritize its customers' preferences for lower-cost service without being locked into a plan, Quigg says.
Wynn Resorts (WYNN). The largest position Miller's firm holds is in Wynn Resorts, where CEO Steve Wynn invests more than just his own money by holding shares. If Wynn manages the company poorly, it hurts his name, because "the man running the company is the brand," Miller says. Wynn, an industry innovator, also has a proven track record for allocating capital shrewdly.
Penske Automotive Group (PAG). Like Wynn Resorts, this operator of auto and commercial truck dealerships shares the name of its CEO, who owns a good chunk of its stock. The company also has bought back stock and is a smart acquirer of businesses, Miller says.
FedEx Corp. (FDX). Founder Fred Smith, who still runs this delivery company, has a good track record, particularly for adopting technology and making acquisitions, Miller says. He especially likes FedEx's wise use of capital, such as its investments in fuel-efficient aircraft, as well as its deal-making savvy. After a deal fell through for rival United Parcel Service (UPS) to buy TNT Express, FedEx got the job done. "That says a lot about management, true negotiating skills," Miller says.
