How Language Reveals Management’s True Commitment to Shareholders

During their recent episode, Taylor, Carlisle, Ben Beneche discussed How Language Reveals Management’s True Commitment to Shareholders. Here’s an excerpt from the episode:

Jake: What do you look for with management?

Ben: Look, skin in the game is great, but really, we want management who have an intangible insofar as they’re obviously thinking for the long-term. They’re willing to make those trade-offs which are maybe hard today, but which are in the long-term benefit of the business.

So, the obvious thing is management teams, who don’t employ too much leverage. In the US, almost every company we look at is optimized to within an inch of its life. In many cases, it’s great while it lasts, but you have a small hiccup and it’s one thing that you learn, I think when you’ve done this business for even a short period of time. You realize that black swan events, 25 standard deviation away from the norm stuff happens all the time, and you don’t want management teams who are going to stumble at the first hurdle. So, it’s a conservative balance sheet. It’s skin in the game. It’s a history of strong capital allocation.

On the intangible side, it’s management teams, what I’m kind of a sucker for is management teams who talk themselves down. I remember Mark Leonard for years would say how expensive his stock is. It might be now. [Jake laughs] It probably wasn’t 10 or 15 years ago with the benefit of hindsight, looking at how cash flows did evolve over time. Management teams who talk down their prospects, talk about their failures as much as they talk about their successes. These are intangibles that are actually quite rare. I can count on the two fingers of two hands and maybe my toes, the number of management teams who actually do that.

Jake: I’ve discovered one little hack, little secret tip, in how management talks about the company or the assets. The worst is when they say, “My company, my assets, my employees,” whatever, next best is our company, “Our assets. That’s a little bit better.” And that’s what average looks like. But the best, and you’ll hear Buffett when he’s talking at the shareholders meeting, is he say “Your assets, your company, your employees.” I think there’s a little bit of tell there in how the management even discusses what they’re in charge of that stewardship.

Ben: Yeah, that’s totally true. If you’re actually thinking about investing in public equities as a permanent owner, that’s how we like to think. You’re expecting to get your return from the business, you need to trust the people in charge. If you pay, let’s say, a 6% earnings yield or free cash flow yield and it’s growing 6% a year, if you assume no exit value for that business, it’s taking you well over a decade to earn a return and probably a couple of decades to earn a 10% IRR. You’re just relying on the cash flows. If you don’t trust the people in charge to make that accrue to you in some way or another, some point in that journey, what’s the point? You are in the greater full game. I don’t really want to play that game. [chuckles]

Tobias: It’s been working pretty well for the last 15 years– [crosstalk] [laughter]

Jake: Somehow there’s always another fool right behind this.

Ben: I know.

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