How important is senior leadership at a company and what happens when there are changes at the top?
There is no question that senior leadership provides vision and direction for a company, in fact, that is probably their most important job. Management layers below them are responsible for translating that vision and direction into products and services.
There are exceptions, of course. Steve Jobs the mastermind of Apple was intimately involved in product development, setting a standard that underlings had to meet or exceed.
His death left a question hanging over the company: could Apple continue its market dominance through innovative hardware-software pairings or would it falter?
The death of a key leader is not a common occurrence. In many cases, senior leadership is replace because of poor results or some public moral lapse.
The key for long-term investors is focusing on companies with depth in its leadership ranks, so if a key member of the team leaves unexpectedly, the company can continue. Ask your self these questions:
- Is the company adapting to the reality of global markets?
- Does the company spend as much, if not more, on developing new products and services as other companies in its industrial sector?
- Does the company build products and services that have broad appeal in their industry or do they focus on a very narrow segment?
These are important decisions and what companies pay key executives millions of dollars to make and make correctly.
We're all human and make mistakes and that includes executives of companies. When company leaders stumble, watch the price of the company's stock for long-term trouble.
Of course, a "mistake" is not some accidental consequence, but a decision to choose one action over another. In some cases, the mistake involves something out of an executive's private life - a messy divorce, inappropriate relationships at work and so on.
With the egos of some executives, the only mistake they believe they have made is getting caught. In many cases, money changes hands and the "mistake" goes away without seriously damaging the company or its long-term business outlook.
In any well-managed company, the loss of a key executive, while painful and disrupting in the short-term, should not permanently damage the company's future.
However, there are "mistakes" that can seriously damage a company's future and those are the ones that long-term stock investors must fear.
For example, no one likes the shift of U.S. manufacturing jobs overseas, however the reality is lower production costs can keep a company competitive. The global economy means many companies must compete not only with domestic competitors, but those overseas.
Not too many years ago, the U.S. dominated the personal computer market. However, Asian manufacturers are growing dramatically and now threaten U.S. dominance. Many of these competitors were (and some still remain) the overseas manufacturers of U.S. computers and computer components.
Companies that don't adapt to the reality of global competition and the pressure that puts on controlling expenses are at risk for losing market share. Companies built around unsustainable growth face a risky future - growth is no longer assured and neither is market share.
Stock investors should look for companies that have dominant market positions and the ability to change with the economy and global competition.
Many years ago, "made in Japan" was the punch line to a joke about shoddy product knockoffs. However, over the years Japan worked hard to move from copy-cat to innovator. Now, "made in Japan" is a mark of quality.
The same cycle is repeating throughout Southeast Asia. China, assuming it doesn't stumble at the top, will continue to apply pressure on lowering costs and increasing market share. U.S. companies in almost every industry face this growing global pressure.
Companies that take a pro-active approach to globalizing business practices will give themselves the opportunity to grow. Those companies that hope to hide behind protectionism and a failure to acknowledge the new (and changing) global economy have a dim future.