Finding the Right Mix of Visionaries and Optimizers

4 October 2018 | by Todd Wenning, CFA

In the classic Nintendo game, Ice Hockey, you pick a team of four players with one of three body “types.”

Trait “Skinny” “Medium” “Heavy”
Speed Fast Average Slow
Slapshot Weak Average Strong
Checking Weak Average Strong
Face-Off Good Average Poor

*Source: GameFAQ

The optimal four-player mix is debatable, but no gamer would seriously recommend picking the same player type for every position. If you picked all “Skinny” players, for instance, you could fly around the rink, but you’d struggle to score. On the other hand, if you picked all “Heavy” players, you’d move like molasses. Once you got the puck, however, you were a scoring threat. Instead, some mix of the three player types provided a balanced offense and defense.

It’s much the same with corporate management teams. Too much of one personality type will typically lead to poor long-term results.

In June, we introduced our framework for evaluating Visionary and Optimizer CEOs, describing them as such:

Visionary Optimizer
Primary Motivation Intrinsic Extrinsic
Objective Growth and innovation; Fulfill mission Maximize cash flow and ROIC
Moat type Emerging/Reinvestment Legacy
Fiscal discipline Loose Frugal
Problem solving style Creative, experimental Disciplined, methodical
Capital allocation strategy Reinvest in the core business Opportunistic buybacks and M&A
Corporate culture Energetic, perhaps cult-like Decentralized, reserved
Major risks Loss of focus, no moat materializes Poor execution, lack of investment opportunities

 

We presented these differences, in part, to illustrate how investors – particularly value investors – can miss good investments by focusing solely on Optimizer-type CEOs and overlooking the opportunities presented by Visionary-led businesses.

Perfect harmony

An important point to add is that management teams are a mix of Visionaries and Optimizers. The wise leader – Visionary or Optimizer – will surround himself or herself with different and complementary personality types.

The most productive companies strike the right blend of Visionary/Optimizer skills at the right time in the company’s lifecycle. Think about Steve Jobs (Visionary) bringing on Tim Cook (Optimizer) to lead Apple’s worldwide operations in 1998, Mark Zuckerberg hiring Sheryl Sandberg as Facebook COO in 2008, or Google co-founders Sergey Brin and Larry Page naming Eric Schmidt CEO in 2001. If Visionaries don’t bring on Optimizers at the right time, it can stall the company’s progress. Conversely, if Optimizers don’t listen to Visionaries, it can accelerate the company’s terminal decline.

On this point, we believe one of the reasons blue chip consumer-packed goods (CPG) companies have struggled to fend off niche-brand upstarts like Dollar Shave Club, RxBar, and HaloTop is that they’ve been too reliant on Optimizer-type management. The CPG incumbents were so worried about hitting numbers, that the newcomers vaulted over the blue chips’ moats and walls before the alarm was even sounded.

To be fair, it’s hard to blame CPG companies for focusing on efficiency in the past decade. Private equity and activist investors were waiting in the wings. Still, we think companies like Procter & Gamble, Kellogg, and General Mills need to inject more Visionary types in their ranks to rekindle existing brands and build new ones faster than the upstarts can.

Bottom line

Ultimately, we want to invest with management teams who understand how to widen the company’s economic moat and allocate capital in a manner consistent with maximizing long-term, risk-adjusted shareholder returns. When there’s no blueprint for success, we look for evidence of Visionary leadership to discover creative solutions and build a moat. On the other hand, when the company is already the dominant player in an industry, we prefer management teams that have Optimizer traits like capital allocation skill and operational efficiency, which can further widen the moat.

As of the date of this blog post, clients invested in Ensemble Capital Management’s core equity strategy own shares of Apple (AAPL) and Alphabet (GOOGL). These companies represent only a percentage of the full strategy. As a result of client-specific circumstances, individual clients may hold positions that are not part of Ensemble Capital’s core equity strategy. Ensemble is a fully discretionary advisor and may exit a portfolio position at any time without notice, in its own discretion.

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