Category: Technology

Predicting CEO Actions and Financial Outcomes Based On CEO Personality

Predicting CEO Actions and Financial Outcomes Based On CEO Personality

Could we have predicted that Elon Musk’s restlessness would have led to his founding of (SpaceX) even though he more than had his hands full with Tesla? How about his latest company – “The Boring Company” – could its founding have been predicted? The answer is “maybe”.

Are we surprised by Musk’s emotionless approach to firing certain employees (as documented by WIRED)? Not in the least. Musk’s personality profile suggests he values self interest completely over co-worker interests (Musk scores 0% on “Agreeableness”, the attribute that speaks to the degree in which one values self-interest over other peoples’ interests). 

Elon Musk’s “The Boring Company” tunnel. https://www.boringcompany.com/

For much of 2018 we at CEORater have experimented with personality analytics as applied to public company CEOs. We partner with IBM’s Watson Group for the raw analysis of public documents – primarily earnings call transcripts and analyst day transcripts. We then apply our own business rules as informed by our experience as well as work out of Stanford University (led by David Larcker), the University of Chicago, the Stern School of Management and Harvard University. 

It’s early days, but we believe that if we were to analyze every public company CEO we would eventually identify personality traits that correlate to financial performance and very well may be predictive of financial operating performance at the company level. Larker’s research suggests as much. 

Mr. Musk’s full personality profile may be accessed HERE.

Wired’s recent profile of Mr. Musk may be found HERE.

Elon Musk: “Openness” Attribute.
Stock Buybacks & Overzealous Cookie Consumption

Stock Buybacks & Overzealous Cookie Consumption

You are a Technology company CEO and/or Board member and the company generates significant free cash flow. You are thinking through your options as to how best to deploy discretionary capital:

1.) M&A: Our advice is go for it. M&A is rarely easy for a variety of reasons but a disciplined approach can result in a positive ROIC rather quickly. Further, M&A can augment or almost entirely replace (speaking from experience) organic product development. There aren’t any shortcuts to effective M&A execution. Assuming two parties agree on strategic fit and are willing to engage, rigorous due diligence is the only way to ensure product/ technology stack fit, cultural fit, financial health of the target etc.

2.) Pay a Dividend: The optimal way to return capital to shareholders. 

3.) Invest in New Product Development: Whether it is an ambitious technology re-write, product refreshes or small dollar experimentation – it is difficult to argue with a technology company that wishes to invest in its product portfolio.

4.) Stock Buybacks: Skip them. Buybacks/ share repurchases have been in vogue with I-Banks and companies for the past decade. Bankers like buybacks because they generate fees. Shareholders like them because they prop up the stock and provide liquidity. Companies like them because they prop up the stock, their large shareholders often recommend them and they reduce options dilution. We don’t like share repurchases because they represent an undisciplined approach to providing liquidity to shareholders. Further, once shareholders and companies get hooked on share repurchases, it is difficult to find discipline. John Malone says it succinctly with his cookie consumption analogy: 

Now Is the Time for Apple to Acquire SoundCloud<span class="badge-status" style="background:red">Premium</span> 

Now Is the Time for Apple to Acquire SoundCloudPremium 

Podcasts (and Music) Provide Apple an Opportunity to Gain Market Share  Apple wishes to boost its iCloud business which lags AWS, Google and Microsoft’s cloud offerings. In addition, Apple Music lags Spotify. In podcast land, the Apple Podcast directory commands approximately 70% market share. Other directories include Google Podcasts, Stitcher, iHeartRadio and many others. The…

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CEORater Technology Founder CEO Index Significantly Outperformed YTD

CEORater Technology Founder CEO Index Significantly Outperformed YTD

Regular readers know that we are partial toward Technology Founder CEOs vs. hired CEOs as a general rule.  Our experience is that founder CEOs are generally better than hired CEOs at anticipating customer market needs, in many cases before customers know they have a need. Founder CEOs care deeply about details of the business that a hired CEO may not give more than a casual glance. Founders in many cases work to leverage their smart senior business leaders whereas hired CEOs may feel threatened by a direct report’s potential. We could go on.

Our CEORater Technology Founder CEO Index has performed well year-to-date through December 6th enjoying a Total Unweighted Return of 14.2% and a Total Weighted Return of 17.1%.  The comparable benchmarks returned 5.1% and 4.4% on an Unweighted and Weighted basis respectively. You may access the detail HERE.

Speaking of Technology Founder CEOs, we recently hosted a podcast with SS&C Technologies (ticker: SSNC) founder & CEO Bill Stone where we discussed M&A strategy, SS&C’s decentralized management approach (another core principal of ours) as well as SS&C’s “Singularity” artificial intelligence (“AI”) and machine learning (“ML”) initiative. In the case of SS&C, we believe that AI and ML will drive efficiencies across back office and middle office-related products and services – enabling customers to drive incremental throughput with less effort. Further, AI & ML has the potential to create revenue and EBITDA opportunities for front-office customers (facilitating deal sourcing as an example). You may access the episode below:

Don’t Give Investors A Reason to Say “No”

Don’t Give Investors A Reason to Say “No”

Investors Allocate Premium Valuations to That Which They Understand

My theory is that institutional investors implicitly penalize complexity. I base my theory largely on 23 years of capital markets experience and intuition and admittedly have little data to support it. I believe that investors will invest a dollar in Company A assuming that “A” has a simple story (one that may be tracked by observing revenues, operating profits, earnings and user growth) before they will invest a dollar in Company B, where in the case of B there are multiple business drivers and a lack of user metrics. I believe this to be true even if B has slightly better top-line growth, bottom-line growth and a slightly more attractive valuation. In other words – transparency and simplicity is preferred over complexity – even if all else isn’t necessarily held equal.

The primary drivers for the above behavior are threefold:

1.) Institutional investors have limited resources;

2.) Institutional investors are concerned for their jobs (rotation of assets from active to passive investment products, fee compression and market volatility account for numbers 1 & 2);

3.) Human nature – it’s easier to support an investment idea when one understands the drivers at a nuanced level.

Therefore, many investors will follow the path of least resistance and invest where they are comfortable and avoid complexity.

Remove Friction Points from Your Investor Story

Public companies must remove obstacles that prevent investors from participating in the stock. Much like software companies work to remove friction points from the user experience, companies ought do the same with investors – don’t give investors a reason to say “no” to your story.

Where possible Enterprise Technology companies ought to disclose user metrics. I understand that to disclose the number of users would not tell the full story for many companies. For example, one could not neatly attach a user count to consulting revenue. It would be equally difficult in many cases to attribute services revenue to a defined user set. Certain offerings are not billed at the user level, therefore it is difficult to arrive at a user count. This should not prevent you from working to arrive at some aggregate user count even if doing so would only partially tell your company’s story.

I can imagine a line in a quarterly press release that would read as follows: “User count was 15,000 as of 9/30/18, up 5% from a year ago. This user count is relevant to approximately 70% of our business from a total revenue standpoint.”

The above disclosure probably isn’t useful if it describes less than half of your total revenue. However, increasingly Enterprise Technology companies are moving to subscription billing models that incorporate user counts into the pricing equation and therefore lend themselves to a reported user metric. If you are new to this publication, we are big fans of recurring revenue models (our recently published article: “Every Company Should Consider Adopting A Subscription Revenue Model“).

Consumerization of Investor Communications

Last, the benefit of this disclosure goes beyond transparency and simplicity. I believe there is an investor psychology benefit. Investors intuitively understand “user-driven” business models as most investors – particularly younger ones – are abundantly familiar with user-driven companies from their day-to-day lives: Netflix, gym memberships, premium apps, AMZN Prime. This familiarity helps grease the skids on the investor due diligence path. We have experienced the “Consumerization” of Enterprise Technology. Think of this as the “Consumerization of Investor Communications”.

Every Company Is A Content Company

Every Company Is A Content Company

Notice anything about the above image? It looks like a Facebook feed and five of the nine content pieces (only three are fully visible), are videos. The image is a screen capture from Goldman Sachs’ homepage – part of a modernization/ outreach effort under new Goldman CEO David Solomon.

Personally I’ve noticed that companies are increasingly publishing video content to their Instagram and YouTube pages and Websites in an effort to tell their story (86% of companies publish video content to their Websites and 77% publish video to their social media pages). This is surely becoming a prerequisite for recruiting and engaging employees as well as a tool for articulating use cases to customers and prospects.

Below we highlight several examples of companies that imaginatively use content. We focused on Websites as opposed to social media pages as many companies view their Website experience as an afterthought and doing so carries significant opportunity cost. Websites typically have less than 10 seconds to make an impression before users move on.

1.) Goldman Sachs: the company uses content to tell a story and to provide direct access to CEO David Solomon. Congrats to a company in an unsexy space deploying engaging content to its benefit.

2.) Red Bull: perhaps the best pound-for-pound content delivery company. RB homepage is video-driven, tells stories and mimics a social media feed while optimized for the mobile experience.  https://www.redbull.com/us-en/

3.) GoPro: visually engaging and easy to navigate retail-centric Website. https://gopro.com/

Key takeaways:

Engage visually – especially with video. Important both in terms of capturing viewers’ attention and also in terms of providing access to senior management. It’s up to you what video content you want to post publicly, although the world is becoming increasingly transparent. As CEO why wouldn’t you want to make time for regular, short-form video content that keeps employees (most important), customers (2nd most important), the Board, the community and investors informed about your current thinking?

I believe 100% that companies which communicate regularly with employees in a transparent manner are going to win the war for talent. Video is ideal for communicating in a scalable, global fashion. You should assume that video messages created for intracompany consumption will find their way outside of your company. Therefore, construct your message with this in mind. One transparent message for consumption by all is the best way to ensure consistency across audience cohorts.

Young users want to watch a short video, swipe right or left and engage through voice.

Google, Microsoft and Amazon have open-sourced their core machine-learning layers as well as basic AI-services, so it’s easy to deploy AI-powered voice assistants and to capture those front-end customer interactions in your machine learning layer.

Google ML-development kit for mobile developers

Microsoft Cortana Dev Center

Microsoft Azure Developer Tools

Amazon Alexa Dev Page

 

Share Your Story with Us

Share Your Story with Us

Many of our readers are Technology CEOs and institutional investors. If you wish to tell your company’s story, or a portfolio company story let us know. Beginning in 2019 we plan to occasionally profile Technology companies in these pages and on our CEORater Podcast. Send me a note directly at jmaietta@ceorater.com. Thanks for reading!

 

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CEORater FinTech Founder 5

CEORater FinTech Founder 5

The 5 top performing FinTech stocks year-to-date (as of 11/08/18) that are led by founder CEOs. This list is based on an extract from the CEORater database (CEORater.com). Access PDF version HERE.

Square (ticker: SQ) YTD stock price performance: 108.0%

Square founder CEO Jack Dorsey

Green Dot (ticker: GDOT) YTD stock price performance: 55.8%

Green Dot founder CEO Steven Streit

Virtu Financial (ticker: VIRT) YTD stock price performance: 36.3%

Virtu Financial co-founder CEO Doug Cifu

SS&C Technologies (ticker: SSNC) YTD stock price performance: 27.8%

SS&C Technologies founder CEO Bill Stone

MSCI Inc. (ticker: MSCI) YTD stock price performance: 19.1%

MSCI founder CEO Henry Fernandez

 

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