By Robert Stammers, CFA
Director, Investor Education
One conclusion some investors might draw from Apple’s tremendous stock performance after Steve Jobs’s death is that the Apple Inc. (AAPL) brand is strong enough to thrive independently of the company’s iconic founder.
Even though Apple has shot through the roof post-Jobs, investors should not discount the importance of thoroughly evaluating the quality and character of a company’s management. Rather, Apple demonstrates how the new CEO has been able to maintain continuity of the type of leadership that has made the company one of the most valuable in the world.
Cooking Along
Apple knew for some time that finding a successor to Steve Jobs was imperative. On 14 January 2009, Jobs announced that he would be taking a medical leave of absence because of his ongoing fight with pancreatic cancer. Two years later, after returning to Apple in a more limited capacity, Jobs took his second medical leave of absence as his health continued to deteriorate. Finally, when it became clear that Jobs would no longer be able to fulfill his responsibilities, Tim Cook became CEO on 24 August 2011.
Of course, there was palpable unease among many Apple investors who were unsettled about the lack of transparency surrounding succession plans. But things seemed to have worked out fine.
Since Cook took over, Apple has more than doubled the performance of the S&P 500 Index as well as that of competitors like Dell Inc. (DELL) and Google Inc. (GOOG). The first-quarter earnings report (Apple’s first since Jobs’ death) showed profits more than doubling to $13 billion, up from $6 billion in the first quarter of last year. Revenues jumped from $26.7 billion to $46.3 billion. Undoubtedly, Cook has, thus far, demonstrated the ability to continue the strategic vision of Steve Jobs.
Value of Great Leadership
Apple’s continuity of exemplary leadership, notwithstanding the ambiguous succession plans, demonstrates the importance of determining the quality of management in the investment decision-making process. Cook is proving to be up to the challenge of assuming the leadership role at Apple, and the stock performance is mirroring this reality.
This is not to say that Apple will continue to generate the types of returns that it has been generating in recent memory. Investors need to determine if, among other factors, there is still value to be realized with a stock that given its recent performance gains.
The purpose of highlighting Apple is to demonstrate how management is something that investors need to consider when making investment decisions. As it turns out, in many cases investors are unprepared to assess the quality of management and its effect on investment risk. Dave Ulrich, Norm Smallwood, and Michael Ulrich state in “The Leadership Gap,” found in the January/February 2012 edition of CFA Magazine, that assessing company leadership is most investors’ most glaring weakness when making investment decisions:
Investors have much less confidence in their ability to assess quality of leadership, and they sense a much higher risk associated with their evaluations. . . . Clearly, leadership matters to investors but is difficult to define, measure, or track.
Assessing Management Value
Fortunately, there are strategies and resources available that can help investors analyze the quality of management and incorporate that information into their investing choices. To begin, assess if management has the investor’s best interests in mind. Look for:
- Compensation of management being tied to performance of the company,
- Equity interest in the company being granted to managers, and
- Internal control systems being implemented that provide a way to monitor performance and decision-making behavior of management.
In terms of company-specific characteristics, ratings agencies like Standard & Poor’s and Moody’s assess management by analyzing strategic direction, financial philosophy, conservatism, track record, and control systems.
Additionally, some research and data companies, such as GMI, which runs The Corporate Library, offer services that rate the quality of management and provide extremely in-depth analysis and reporting on public companies.
Informed Decision Making
Without tools like The Corporate Library, it may prove difficult for some casual investors to assess the quality of management on their own. A qualified financial adviser can help perform this analysis on behalf of the investor.
To be sure, the benefits of being able to evaluate management are clear. Ulrich, Smallwood, and Ulrich conclude in their January/February 2012 CFA Magazine article, “If investors had better information about the quality of leadership within a company, they would reduce their risk, increase their confidence, and make more informed decisions.”
Tim Cook appears to have passed his early test, but investors should decide for themselves if he will be able to continue to drive Apple like his predecessor did.
You should follow us on Twitter @CFAInvestorEd.
The information contained in this article and from any related communication is for informational and educational purposes only. The information in this article should not be interpreted or used as investment advice. CFA Institute does not recommend or endorse any investment security, product, or strategy or any service, product, or material submitted by or linked to this article by third parties.
