The problem of managing well is multifaceted. In contrast to many key topics of discussion on this website which attack conventional thinking, the study of managerial excellence is a field that continues to provide a lot of value.
Perhaps one of the reasons for studying great managers is of such interest to so many is that leadership is such an obvious component to what makes an organization successful. Stories of star athletes, clairvoyant CEOs, empathetic coaches, and teachers are easily digestible models of effective behavior.
The study of managerial excellence necessarily covers topics such as social and behavioral psychology, business acumen, acquired wisdom, and the environment the manager finds him or herself in. Team dynamics and the role of habits virtues and faith also play a role. This list of studies goes on and the problem of defining managerial excellence can be sliced a million different ways.
The depth of this topic presents a problem. Great managers could be studied for a lifetime. And, academic business literature seems to follow trends with a given style of management coming into or going out of vogue. And, every so often, a leader that is so transformative comes along to re-reveal something already known but forgotten. In the rarest cases, exceptional leaders reveal something new about the human person not widely known before.
With so much to be studied, what can be said concisely about the characteristics of the best managers? While there is likely much that is yet unsaid about what a good manager is, an analysis of the characteristics of the best managers must concise to be helpful.
In an effort to deal with this problem, modern studies of management tend to focus too narrowly on a single characteristic or flavor of management. Investors, owners, and management teams need to be able to readily identify these characters and hire, retain, and motivate them.
Learning is, after all, a lifelong process. It is ultimately more valuable to have a discussion that focuses on two key topics:
- A list of characteristics that would disqualify the best management.
- A framework for identifying the best managers worth studying.
Characteristics that would disqualify a manager as a great manager:
Because there is so much data to comb through related to great leadership. Working on the problem of identifying the ideal characteristics in reverse is a much more helpful exercise. A major swath of leaders can be eliminated by simply filtering the vast majority of individuals and skills using negative criteria.
Why take this approach over listing every positive characteristic? First, there are too many positive characteristics to catalog, and not all of them as valuable to a business owner or investor. Second, every leader, no matter how great, will fail to exhibit the best characteristics all the time. People, even the best among us, fall short of having every desired or ideal characteristics. It is far easier to disqualify behavior generally than to qualify all positive small behaviors.
The best managers do not display serious repeated failures of any of the following characteristics related to business practices:
- Ethics
- Morality – they won’t change the definition of right and wrong.
- Honesty – they won’t repeatedly lie or making false promises as a method of persuasion.
- Social pressure – they won’t do anything to harm the reputation of the firm or allow employees to conduct themselves in a way that would.
- Temperament
- They won’t force others to bend to their temperament but instead will cultivate an environment that fits the effectiveness of the organization; not necessarily their own preferences.
- They won’t force others to bend to their temperament but instead will cultivate an environment that fits the effectiveness of the organization; not necessarily their own preferences.
- Passion and Energy
- Not indifferent about the business, employees, or the company’s product. Care less about the money than the work to be done.
- Not lacking in the energy required to undertake the difficult tasks that will come about because of business volatility.
- Performance
- Financial performance – won’t pursue financial performance that harms long-term business performance.
- Business performance – won’t pursue growth at a cost to financial performance.
- Shareholder orientation
- Won’t put personal interests ahead of shareholders.
A framework for identifying the best managers worth studying
In the business world, a person or persons may have tremendous skill in marketing themselves to generate visibility to their ideas. And, as a result of this skill, they may become rather well known. While marketing is certainly a great skill it is not an absolute qualifier of a manager worth study.
For to everyone who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.
— Matthew 25:29
The Matthew effect, as this has been called, is an observation of a law of nature. We see it in biology all the time. The superior species in a niche tend to dominate that niche.
The Matthew effect was coined by Robert K. Merton to describe how the most eminent scientists in the public’s mind tend to get more credit than an unknown researcher even if they have similar work. He observed that credit will more often than not be given to already famous researchers. In academic science, the relative fame of a researcher can be broken into three components. Innate ability, compounding on early success, discoverability.
We see this model play out in the world of fund management. Fund managers with the innate ability get an early win and if they get visibility in the press they can massively increase the size of their fund. Data suggests that the small fund managers often outperform larger fund managers and suggests that large fund managers crowd out the lesser fund managers; who find it harder to raise capital despite their skill.
Extrapolate this phenomenon to the general business environment and what do you get? You can believe Jack Welch was talented. But was he the best of his comparative era? Probably not, but he was certainly better well known. Some of his innovations around hiring and firing were later discarded as inappropriate for most firms. But his techniques were tried by a great many because of his popularity.
Notable and quotable business managers may fit many of the characteristics of the best managers. But that does not make them as worthy of study as others.
Fame has an effect that causes many elements of a person’s character to be overlooked. Unless relevant for a role, it should be carefully guarded against as a criterion for selecting management. The mind makes shortcuts in making decisions and judgments about people.
The chief criteria for a business leader or manager worth studying by their:
- Fit the previously defined negative criteria
- Track-record for success
- Capacity for growth
- Leadership skills
Evaluating a management team’s track record:
It would be tough to evaluate a class of MBAs and pick which ones would prove to be the best managers, just like it would be tough to pick the best golfer by watching them hit on the practice range.
We haven’t tried to evaluate, before they have a record, who will be superstar managers. Instead, we find people who’ve batted .350 for 10-50 years. We just assume we won’t screw it up by hiring them. We take people who play the game very well and allow them to play
– Warren Buffett, 2005
Businesses often take a long time to produce an economic result. A track record of years is a necessary prerequisite for evaluating the capability of management. It is very rare to have an economic result that will play out over a very short period of time.
A track record consists of capital allocation ability as well as returns for shareholders compared to a benchmark. Consider that a manager can produce excellent results within a difficult industry but still not be the Amazon or Tesla in terms of outsized growth.
In most instances, benchmarking a manager against a market measure such as the return of S&P 500 is an appropriate comparison. Special consideration should be given when markets are at exuberant or depressed levels for extended periods of time. Market measures that should not vary too considerably will be return on capital and return on equity for shareholders.
Specific industry comparisons should include, management’s effort to build durable competitive advantages for the firm against margins, growth rates, and market share.
While a longer track record is better, at a minimum, a five-year track record should be the base standard for evaluation.
Evaluating a manager’s capacity for growth:
‘ What you should measure is not a person’s current capabilities but their capacity to learn and grow’
– Bill Gates
This criterion is straightforward. Will the person continue to learn and develop through their career and at what rate and for how long?
Track record may indicate that there is a considerable amount of capacity remaining in the proverbial gas tank.
What is the person doing to improve? What are their habits? What is their self-assessment of their current state of knowledge and capability?
Evaluating a manager’s leadership skills:
People can succeed in business with neither leadership skills nor business skill. Sometimes luck plays a role. The question of leadership is not always as technical as many other criteria in this discussion but follows a set of questions.
Who is the most generous and honest person in a bunch? Who gives credit to other people for their ideas? Who best inspires others to carry out their interests?
Contrast this with negative criteria presented earlier. Consider the seven deadly sins.
Admirable people are the best place to start evaluating general leadership skills.
Why capitalism produces the best managers:
Capitalism allows capital to be allocated to those who can use it best. Capital isn’t just money, it’s human labor and will. The best leaders will inevitably command a large share of it.
Rational owners and managers should build leadership teams based of this natural tendency.
