Management can make all the difference to a company's success and thus its share price.
The best companies are those run by talented and experienced leaders with strong vested interests in the success of the business, held in check by a board with sound financial and business acumen. Some of the worst investments to hold are those run by executives collecting fat rewards as the underlying business goes to pot.
In this series, I'm assessing the boardrooms of companies within the FTSE 100 (UKX). I hope to separate the management teams that are worth following from those that are not. Today I am looking at airport scanners-to-medical devices conglomerate Smiths Group (LSE: SMIN).
Here are the key directors:
|Donald Brydon||(non-exec) Chairman|
|Philip Bowman||Chief Executive|
|Peter Turner||Finance Director|
A bruiser leaves...
Donald Brydon was appointed chairman in 2004. He is a City veteran better-known as the current chairman of Royal Mail, and former CEO of Barclays' investment management arm and AXA Investment Management.
Amongst a string of current and former directorships, Mr Brydon became chairman of FTSE 100 software group Sage last September and shortly afterwards announced that he would step down as Smith's chairman this year, once a replacement is found.
With something of a reputation as a 'bruiser' and a string of takeover battles under his belt, it's possible Mr Brydon's departure will precipitate a bid, break-up or major assets sale at Smiths, in the manner of those that have taken place at similar mid-sized industrial conglomerates Invensys and Cookson. A less formidable opponent might hasten an opportunistic bid, whilst conversely reducing the premium shareholders might get. In 2011 the company rejected a bid for its medical division.
... but the break-up specialist stays
CEO Philip Bowman is no stranger to sales and break-ups. Before joining Smiths in 2007, he was CEO of Scottish Power for less than 12 months before selling it to Iberdrola, and before that was CEO of Allied Domecq when it was sold to Pernod Ricard. (Perhaps not coincidentally, Donald Brydon was a director of both companies at the times.) Mr Bowman had earlier been finance director of Bass breweries and of Allied Domecq, where he oversaw the disposal of the pubs business.
Mr Bowman took a knife to Smiths' cost base on his arrival (despite being dubbed 'First Class Phil' for his contract stipulating first class travel), and has overseen a modest 20% outperformance of the FTSE index during his tenure. The company had underperformed the index in the ten years prior to his arrival. He attracted the disapproval of the Association of British Insurers over a subsequently-abandoned pay scheme and a £200,000 top-up payment in 2011.
Finance director Peter Turner joined in 2010, having pursued a career in finance roles largely in the oil and gas sector after qualifying with PricewaterhouseCoopers.
Brains and connections
Smiths' is a scientifically-savvy board, with five of the eight directors having science degrees. Two of the others have business degrees and the sole arts graduate is Sir Kevin Tebbit, a former civil servant whose top roles at GCHQ and the Ministry of Defence no doubt provide the company with invaluable contacts.
I analyse management teams from five different angles to help work out a verdict. Here's my assessment:
|1. Reputation. Management CVs and track record.|
|2. Performance. Success at the company.|
|3. Board Composition. Skills, experience, balance|
|4. Remuneration.Fairness of pay, link to performance.|
|5. Directors' Holdings, compared to their pay.|
CEO's is substantial.
Overall, Smiths scores 19 out of 25, a good result. The CEOs successful operational turnaround could yet be topped with an M&A cherry.
I've collated all my FTSE 100 boardroom verdicts on this summary page.
Buffett's favourite FTSE share
Let me finish by adding that legendary investor Warren Buffett has always looked for impressive management teams when pinpointing which shares to buy. So I think it's important to tell you that the billionaire stock-picker has recently acquired a substantial stake in a prominent FTSE 100 company.
A special free report from The Motley Fool -- "The One UK Share Warren Buffett Loves" -- explains Mr Buffett's purchase and investing logic in full.
And Mr Buffett, don't forget, rarely invests outside his native United States, which to my mind makes this British blue chip -- and its management -- all the more attractive. So why not download the report today? It's totally free and comes with no further obligation.