The chief executive officer (CEO) shapes the direction a business will take. Unfortunately, as vital as this individual is, there is no mathematical formula that an investor can use to evaluate him or her beyond company performance metrics. However, there are a four clues that investors can track to uncover a CEO's potential.
Experience is incredibly important at the CEO level. Well-seasoned CEOs are more likely to have experienced several economic cycles and are more able to helm the ship in stormy weather. Also an experienced CEO should be able to understand the history of the industry and be able to predict where it will head in the future. While past success is not a guarantee of future success, a CEO's background can provide some insight into his or her ability to manage, and provide hints as to whether he or she has the potential to be successful.
The company's proxy statement discloses information regarding the CEO's background. Investors should look for CEOs who have positions that increase in responsibility and title as they grow in their industry. (To learn more about the proxy statement, see Pay Attention To The Proxy Statement.)
Also, find out whether the CEO sits on any boards. It's unlikely that boards would include these individuals unless they had a fairly substantial amount of savvy experience and/or intelligence that the industry needed to advance.
|A Seasoned CEO
A good example of a seasoned chief executive is Eric Schmidt, who served as CTO with Sun Microsystems (Nasdaq:JAVA) and as CEO at Novell (Nasdaq:NOVL) prior to being hired in 2001 to become Google\'s (Nasdaq:GOOG) CEO. Schmidt\'s previous experiences at other technology companies are probably what attracted Google to him in the first place, and they undoubtedly help contribute to Google\'s success.
Some executives merely go through the motions and are in their positions solely for the paycheck without true passion for their companies. But the true platinum in this sea of fool's gold is the CEO whose passion and career challenges are of equal if not greater importance than his or her payment package. These individuals are most desirable - but how do you uncover them?
Passionate CEOs are likely to focus on the needs of the common shareholder and make decisions that would tend to benefit him as well as the corporation as a whole. They may also be less likely to job hop.
The proxy statement and press releases may provide some insight into an executive's passion, where statements by the CEO may reveal excitement and an eagerness to face and overcome challenges. Listening to investor calls also may give a clue about a CEO's level of passion by revealing their true tone on their comments. Optimistic and passionate CEOs may use the phrases "opportunity", "overcome", "advance", "explore" and more. Finally, passionate CEOs seem to like to tell their stories, and they are eager to engage investors and converse - much like a proud parent revels in stories about their kids. (For related reading, check out Conference Call Basics.)
|A Chief Exec With Passion
A good example of a chief exec with passion is Jamie Dimon. Dimon made a big name for himself at American Express (NYSE:AXP), Citigroup (NYSE:C) and eventually became CEO of JPMorgan Chase (NYSE:JPM) in 2005. Dimon\'s comments and actions in interviews suggest that his head is always in the game and that he has a true passion for the business. For example, during an interview with CNBC in April 2008, he highlighted the amount of work that went into JPMorgan Chase\'s acquisition of Bear Stearns and the due diligence that had to be done within a three-day period in order to limit job losses. His passion in expression and tone was evident.
3. A Good Communicator
Some CEOs simply overlook the communication aspect to the job, which does not reflect well on the company as a whole. While improving a company's operations is vital, it is just as important for the investment community, the media and consumers to understand and be aware of any beneficial changes.
Good communicators will often take their time explaining how they plan to grow sales and margins and how this may impact earnings. They also often look forward to explaining the company's story - again like a proud papa discussing his kids' accomplishments.
Reading press releases that the company disseminates may give good indications on this factor. If the releases simply give the quarterly numbers and the CEO does not add any supplementary explanations as far as what impacted the quarter, or future earnings guidance, the CEO may not be a good communicator. Conversely, if CEO is adamant about answering investor questions and communicating with consumers, he or she is probably a pretty good communicator.
|A Good Communicator
An example of a good communicator is Apple\'s (Nasdaq:AAPL) founder Steve Jobs. Despite being one of the founders of computing giant, he still got up on stage when Apple launched the iPod and iPhone in order to demonstrate and explain these products in terms the layman could understand. This extra level of attention to detail and willingness to communicate shows that Jobs believes in his company\'s product and wants the world to understand and be aware of the company\'s new initiatives.
4. Street Savvy
CEOs need to be not only "street savvy", but also "Wall Street savvy". That is, they should be aware of the everyday runnings of their company and what their customers expect of them as well as what analysts are looking for in terms of earnings and future direction. Also, they need to find ways to placate, show results and communicate clearly with these often-fickle groups.
A Wall Street savvy CEO may demonstrate his suave moves by addressing analysts by first name (obvious on conference calls or investor meetings) and giving personal responses to their questions - not flippant company responses. They may also have a penchant for under-promising and over-delivering on the earnings front.
Catering to analysts is important, because they can impact the trading of the stock by turning their investors and clients on or off the story. They can also be instrumental should the organization need to raise capital.
To test a CEO's Street smarts, check his or her recent public appearances or meetings. Did the CEO get out on the road and visits with investors? If so, odds are this person is a pretty proactive exec. CEO participation in conference calls and a high rate of media coverage also can be good signs - particularly for smaller companies.
A good example of a street savvy CEO is Steve Wynn, who has been at the helm of the Wynn Resorts (Nasdaq:WYNN) since 2005. He\'s very charismatic and knowledgeable about the industry, and this combination of characteristics causes analysts to listen when he talks. In addition, in spite of his high profile and busy schedule, he\'s quick to tout the company\'s opportunities to media outlets and to Wall Street - particularly the company\'s opportunities in new and emerging markets.
Evaluating a CEO and his or her abilities isn't easy, because a lot of it can't be quantified by earnings results or other metrics. However, through a little sleuthing it may be possible to garner insight on the inner workings of the CEO in question. Once you develop an understanding for the CEO, you will be able to gauge whether that person has what it takes to help your company and stock succeed - regardless of the weather of the market.