The Importance of Management

On Friday morning, Microsoft announced that long-time CEO Steve Ballmer would retire within the next 12 months. The shares surged following the announcement—rising more than $20 billion in total market value at the market’s open. The positive reaction indicates investors believe the prospect of a change in leadership at Microsoft will help unlock value.

When selecting individual stocks, we believe it is particularly important to assess the quality of the management team. Companies that are well-managed often trade at a premium to those that have less highly regarded management teams. In the oil and gas business, ExxonMobil has historically traded at a premium to industry peers. A primary reason is that the company is considered to be one of the best-managed in its industry.

When the perception is that the company is poorly managed, a change at the top can also cause the market to react positively. Earlier this year, Chesapeake Energy’s founder and long-time CEO, Aubrey McClendon, was forced out after a number of concerns were raised about the way he managed the company. The shares are up more than 50% year-to-date, and the majority of the gain has occurred since the company announced a CEO succession plan.

These examples show why quality of management will continue to have an important role in BWFA’s stock selection process.