LONDON -- Management can make all the difference to a company's success -- and thus its share price.
The best companies are those run by talented and experienced leaders with strong vested interests in the success of the business, held in check by a board with sound financial and business acumen. Some of the worst investments to hold are those run by executives collecting fat rewards as the underlying business goes to pot.
Five FTSE boardrooms
In recent weeks, I've assessed the boardrooms of five companies within the FTSE 100: BAE Systems
I analyze management teams from five different angles, giving each a score out of five to make a maximum of 25. Here's my assessment:
|
Company |
Reputation |
Performance |
Composition |
|---|---|---|---|
|
Rolls-Royce |
4 |
4 |
5 |
|
Pearson |
4 |
4 |
4 |
|
United Utilities |
4 |
3 |
4 |
|
Hargreaves Lansdown |
3 |
4 |
2 |
|
BAE Systems |
3 |
3 |
3 |
|
Company |
Remuneration |
Shareholdings |
Overall |
|
Rolls-Royce |
4 |
4 |
21 |
|
Pearson |
3 |
5 |
20 |
|
United Utilities |
3 |
4 |
18 |
|
Hargreaves Lansdown |
4 |
4 |
17 |
|
BAE Systems |
3 |
3 |
15 |
Rolls-Royce's finely tuned board eased into first place among this batch of companies. The CEO has only been in situ since 2011, and the chairman will step down at the end of this year, but two long-standing engineering executive directors help to secure the continuity of management in what looks to be a smooth transition. A well-balanced board has delivered excellent performance for shareholders.
Pearson has an almost equally impressive board, but new management there may well herald changes if the incoming CEO feels less attached to the Financial Times and Penguin divisions. Dame Marjorie Sardino has successfully led the company over 16 years, but her replacement with an internal candidate and the presence of four other executive directors provides continuity, while their substantial shareholdings ensure their interests are aligned with shareholders, rather than only themselves.
Two up
In contrast to Pearson, United Utilities has one of those boards with just two executive directors -- the CEO and finance director. I personally don't like that: I think it gives the CEO too much power to manage the board and keep the lid on the executive team, but I suppose it's a cheap way of satisfying the requirements of the combined code on corporate governance. At least CEO Steve Mogford is an engineer and, hopefully, understands what's going on with the business, but oversight is not improved by chairman John McAdam having a couple of other FTSE 100 board positions to occupy his time.
Shareholders could find little to fault in the performance of Hargreaves Lansdown, but it's not really feasible for the board to score highly in corporate governance when it contains the two founder shareholders, who jointly still own more than half the company. The transition from owner-managers to a normally functioning board is still taking place, and it will be interesting to see how it progresses.
Chairman Dick Olver and CEO Ian King have scarcely won plaudits for their handling of BAE Systems' failed merger with EADS. The reversal of strategy -- putting at risk the U.S. defense contracting business, which has been a major focus of the company under Mr King's leadership -- smacks of a shortage of ideas on a board whose mediocre score seems well-earned.
I've collated all my FTSE 100 boardroom verdicts on this summary page. I hope my research can assist your investment decisions.
Buffett's favorite FTSE share
Let me finish by adding that legendary investor Warren Buffett has always looked for impressive management teams when pinpointing which shares to buy. So I think it's important to tell you that the billionaire stock-picker has recently acquired a substantial stake in a prominent FTSE 100 company. A special free report from The Motley Fool -- "The One U.K. Share Warren Buffett Loves" -- explains Buffett's purchase and investing logic in full.
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