The Two Most Powerful Factors On A Stock

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Most investors will think the headline refers to some ratio like Price to Earnings (P/E) ratio or Price to Book Value or Earnings Growth Or Price to Earnings Growth (PEG) or any other valuable information that analysis will generate.  But those are byproducts of the two most powerful influences on any stock.  They are the CEO and the Board Of Directors.

There is no one more influential in a company's performance than the Chief Executive Officer (CEO).  He (please allow me the use of the masculine with the acknowledgement that there are plenty of "she" CEO's but there aren't nearly as many as "he") is the captain of the ship, the pilot of the plane, the driver of the race car.  No one makes more decisions, makes more capital commitments, makes more plans than the CEO.

He is the one who presents to the Board of Directors (more on them later) the ideas he has for the future of the company as well as how the company is doing right now.  He's the one who manages all the other managers, directs them in what they should be doing daily, where they should be focused, encouraging them to make the company as great as it can be.  He's the cheerleader, the coach, the starting quarterback, and the starting point guard.  In other words, he's going to make the company a success or failure.  Without a good CEO, a company can't return good returns.

Great examples: Larry Ellison of Oracle.  Steve Jobs at Apple.  Jamie Dimon at JPMorgan Chase.  John Chambers at Cisco.  Jeff Bezos at Amazon.  Tony Hsieh of Zappos.  Gary Kelly at Southwest Airlines.  Charles Schwab of Schwab.  John Mackey of Whole Foods Markets.  Angela Braly at WellPoint.  Patricia Woertz at Archer Daniels Midland.   Indra Nooyi at Pepsico.  Irene Rosenfeld at Kraft Foods.  The list can go on. 

Notice that being a great CEO isn't about being popular.  Some of these CEO's have a reputation that isn't very flattering.  Others are extremely well liked by everyone.  But the common thread among them is that they are heading companies that make strong profits.  Without their vision and leadership, these companies wouldn't perform in extraodinary ways.  Their competition is run by other CEO's, and they don't have the results these leaders have delivered quarter after quarter.

How do you measure a CEO?  Basic valuations like Return on Equity and Return on Assets are a good beginning.  But not in just one quarter or one year.  They have to be scrutinized for several years.  And operating income has to be used for the numerator in both cases.  Selling divisions or other extraodinary, one time events that pump up the bottom line don't count.  It's how well the CEO is doing with the business that matters.  Both the ROE and the ROA are in most data furnished by quote programs on sites such as AOL, MarketWatch.com, Yahoo!Finance, and others.

As to the Board of Directors, investors would do well to look at what they do for a job or what their careers were before joining the board.  If they were in venture capital firms, they will have good contacts for raising capital as well as finding management.  If they are from the same industry, they will have good information about the state of the industry as well as many contacts within it.  Or maybe they have a specialty that applies to certain aspects of the company's business such as technology or operations.  Each member should make a contribution that when added to the other board members make for a powerful knowledge base that management can exploit.

The Board is there to protect the shareholder and provide management with guidance as well as oversee how a company is performing.  Board members who contribute the most tend to be ones that have industry experience or special expertise that applies to facets of the business.  Many boards evolve over time.  Usually newer companies have board members who can contribute capital as well as raise more of it.  As a company matures, the board has to gain new members more knowledgable about the business to keep pace with the ever changing landscape. 

The Board is responsible for a dividend policy.  If it's too generous, that will hurt the company's ability to grow, using precious capital to pay investors instead of investing in future projects.  If there is no dividend, it means the board believes investors want growth, not income, from their investment.  Some investors will sell a growth stock when it starts to pay a dividend because they feel the growth days are over.  If they weren't, they determine, the company wouldn't pay out capital that could be used for other, high return investments.

Board backgrounds are available in every annual report which is on file at the SEC site (www.sec.gov).  A good Board of Directors will help guide management without interfering with the day to day operations of a company and make sure the company is moving in the right direction to continually improve investors' capital. 

- Ted Allrich
April 5, 2011



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks


Ted Allrich

Ted Allrich

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