Hey Fools! This below is an essay I wrote in my English class recently about how management needs change. I hope you guys will enjoy it:

Management Needs Change

Out in the business world there is one key factor that will either make or break a business: good management. Dedicated leaders tend to produce great companies, and undedicated leaders who focus on themselves make businesses fail (Collins 10-11). Since many businesses fail when their leaders use the company’s money for their own benefits, we should now pay them based on long-term performance and make sure that they have a stake in the business for themselves by owning shares.

Throughout history we have seen many examples of both good and bad business leaders, all the way from Warren Buffett with Berkshire Hathaway to John Thain with Merrill Lynch. Yes, the latter got fired when he spent over 1.2 million dollars of company money redecorating his personal office including items such as an area rug worth $87,784 and two chairs worth over $28,000 (Bissonnette 1), but this is just one example. After all, many businesses fall short when their CEOs don’t revamp their offices, and many businesses with ostentatious offices never fail, so what is it really that affects the way businesses succeed or not? Is it lack of earnings? Debt? Loss of a competitive edge? It is easy to argue that these are the main cases for most businesses that file for “Chapter 13,” but it can go deeper than that. What went wrong is always caused by something, and in almost every situation that something is a bad decision, and to make it even worse, that bad decision is made from those people we hire to make good decisions. Management is important and we need change.

Not all of these bad decisions seem bad at the time they are made though. Most seem like strong catalysts which just happen to end up failing maneuvers when they were sincerely meant to help the company, and this type of mistake is respectable. What isn’t respectable is when company leaders blatantly use their business’s money for their personal benefit therefore reducing the amount of cash that can be used for business investments that later end up increasing share value. In business one needs to please customers, shareholders, and then oneself in this respective order to ultimately succeed, and when this order is flipped one knows they have a problem. This has been a problem very recently when President Obama issued bailout money to the large, struggling national banks (Montanaro 12-15). Instead of using all the funds to solve their company’s problems, they set a large part aside for the executive’s bonuses when they did not deserve even a single penny. Management is important and we need change.

Bad leaders may be hard to spot at first glance, but with a little digging into the proxy statement this problem can be easily solved. Using the “OATS” method, originally created by The Motley Fool, we can find what good management looks like and by using it inversely, be able to perceive what awful management comes across as (Gardner). “O” stands for ownership, which basically wants to know whether the leadership team has “their money where their mouth is” by owning shares in their own business. “A” stands for allocation, which wants to know whether management can make a profit and generate cash so that the company will succeed. “T” stands for tenure, which wants to know how long the leaders have worked either in the business or in a same or similar industry. “S” stands for stewardship, which wants to know if management treats shareholders as partners and helps them succeed (Gardner).

Now by turning these traits backwards we find that terrible leaders most likely own little or no shares, do not deliver strong financial results, have not worked in the business or industry long, and treat shareholders as “nobody’s”. If you are an investor seeking to invest in a business and come across a management team that is failing most or all the steps in the OATS method, it is time to run far away or sell short, for in most situations terrible management delivers a dreadful future. Management is important and we need change.

Obviously strong management is crucial to the future success of a business and we most definitely need change, but how are we going to obtain this change? By using the traits in the OATS method that show what a good leader contains, we can narrow them down to see which traits we can force upon management to motivate them to do what’s right for the business and for shareholders. We obviously can’t force things such as having a lengthy tenure and excellent financial results, but we can do two things that can be used as incentives to possibly increase the determination and effort put in by executives: pay them based on long-term company performance and force them to have their own stake in the business by owning a substantial amount of shares.

Paying executive compensation based on long-term performance is the best way for paying management because the only way they will receive a great salary is through delivering strong results for their business. Also, by setting goals there is a much higher chance of reaching the desired amount (could be net income, free-cash-flow, etc.) than if one didn’t make it a goal to strive for. Two corporations that have done this and have continued to be successful are Johnson & Johnson and Pepsi. At first glance one sees that the executives receive a whole gob of money for their salary and bonus, but with a little reading one learns that a sizeable amount of it is based off meeting long-term company goals (SEC Archives). By compelling management to set and reach goals in return for payment, the chances go up for the company to have a successful future because everyone knows those leaders want a high compensation.

Forcing management to own a significant amount of shares is extremely important because it aligns their interests with shareholders, which embraces the mentality of wanting the company’s value to go up, up, up! When their own money is at the mercy of the company’s future, it encourages them to make the company consistently succeed. By placing their money where their mouth is it decreases the chances of executives making bad decisions and substantially increases the chances of the company becoming more profitable. Not only will the business’s profits increase and margins expand, but there will most likely be an increase in dividends and share buybacks, two key ways to increase shareholder value.

It is pretty obvious by now that paying management based off of long-term performance and forcing them to own stock is the perfect change we need to boost the quality of our company’s leaders. Not only will we have less conflict, but there will be a large, gradual increase in business value through the process of growing earnings and better control over the balance sheet. Now that we know what is wrong and how to fix it, the only thing left to do is know when to fix it.

The time to solve the problem of unjust management is right now for every minute that ticks away some CEO or president is making a bad decision that benefits themselves over the long-term prospects of shareholders. The sooner people get started in the revolution of company administration, the sooner we will see improvements in the financials of struggling businesses. And when these struggling businesses improve, there will be strong growth in the overall economy making it a winning situation for everyone. So why wait any longer to make change happen? Let us solve the problem today!

Works Cited

Montanaro, J. J.. "Everyone's Asking: Is The Worst Over?." USAA Magazine Fall 2009: 12-15.

Collins, Jim. Good To Great. New York City: HarperCollins, 2001.
Bissonette, Zac.
"Merrill Lynch spent $1.22 million redecorating for John Thain." BloggingStocks (2009): 1. Web. 31 Oct 2009. <http://www.bloggingstocks.com/2009/01/22/merrill-lynch-spent....

Gardner, Tom. "Motley Fool Stock Advisor." How-To: Measure Management. 18 Sep 2009. The Motley Fool, Web. 31 Oct 2009. <http://newsletters.fool.com/18/coverage/issues/2009/09/18/ho....

DEF 14A 1 y74163def14a.htm DEFINITIVE PROXY STATEMENT." SEC Archives. 11 Mar 2009. JNJ, Web. 31 Oct 2009. <http://www.sec.gov/Archives/edgar/data/200406/00009501230900....

DEF 14A 1 ddef14a.htm DEFINITIVE PROXY STATEMENT ." SEC Archives. 24 Mar 2009. PEP, Web. 31 Oct 2009. <http://www.sec.gov/Archives/edgar/data/77476/000119312509061....




Aaron
Who is always grateful to work with business concepts in school :)