A CEO is not everything when it comes to a company or stock, but he or she is very important.
Ideally, the chief executive officer is the leader; and chief decision maker, for the company. Therefore a boss committed to increasing value is always a plus when picking a stock.
Some signs that a CEO is shareholder-friendly and committed to increasing value include:
1. Transparency and honesty. The CEO is willing to divulge all reasonable information about the company and outline his or her plans. More important, he or she is willing to explain his or her philosophy, values, visions, plans and strategies – in a public forum. Signs of such transparency are a willingness to discuss management issues in media interviews, blogs or earnings calls. An excellent example of such transparency and honesty is Warren Buffett’s letters to shareholders; where he tells you everything about Berkshire Hathaway (NYSE: BRK.H). If a CEO keeps a lot of secrets, he or she is not shareholder friendly.
2. Excellent capital allocation. Simply put, the CEO either keeps most of the company’s profits as cash or reinvests them in the company. A good rule of thumb is that a CEO who reinvests at least 60% of the company’s capital back into the company is practicing good capital allocation. Another sign of good capital allocation is that earnings remain equal to 10% of the company’s net worth for 10 years.
3. Stays on the job for the long haul. A good CEO will be willing to stay at the company a long time and invest years at the job. Warren Buffett has been CEO of Berkshire Hathaway for 51 years; Jeff Bezos is the only CEO Amazon (NASDAQ: AMZN) has ever had. These guys’ longevity shows their commitment to their companies and shareholders. Be leery of any CEO that leaves after just a few years, or is willing to stay for less than 10 years.
4. Maintains a high level of float. That is the CEO keeps a large amount of liquid capital (cash) available to cover emergencies, finance acquisitions or improvements or take advantage of opportunities. You can tell if the CEO is doing this by checking the cash and short-term investments investment in the quarterly earnings report. The healthiest and best-managed companies have lots of cash and short-term investments. Alphabet (NASDAQ: GOOG) or Google had $92.44 billion in cash and short-term investments on March 31, 2017, for example.
5. Has a clearly defined dividend policy. This can be “we never pay dividends;” as in the case of Alphabet or Berkshire Hathaway, or a company that pays a steady dividend every quarter as in the case of big banks like Bank of America (NYSE: BAC). An erratic dividend policy such; as only paying out occasionally or different dividend amounts every quarter, is a sure sign of cash flow problems and uncertain management.
6. Has clearly articulated plans and goals for the company. A good rule of thumb is to never invest in a company if you do not understand the CEO’s plans. If the plans are unclear; or the goals sound like jargon, chances are somebody is throwing up a smokescreen to hide a lack of planning.
7. The CEO does not appear in the news very often. Generally, when a person appears in the news, he or she has done something wrong. If you start seeing a CEO in the news a lot, consider selling. When a CEO starts cropping up in on CNBC; or in The Wall Street Journal, every few days there’s a strong possibility something is going wrong, and reporters smell a story.
These are just a few signs of a shareholder-friendly CEO, but always remember the most important sign of a shareholder friendly chief executive; the company is making a lot of money. If the company is losing money, the CEO is the shareholder’s enemy.