Last winter, eager to complete the last of our basement renovations, we decided we could save a few bucks and install the living room projector ourselves. (YouTube made it look so easy!) Three days later, there was a large hole in our newly developed ceiling, a drill bit stuck in our beam… and no projector. With the help of two contractors, one to fix our mistakes and another to install the actual projector, we did eventually arrive at the desired outcome. We learned two things through the process – first, that projectors are harder to install than you think; and most importantly, that competency is essential when trying to predict success.
I would like to think that my husband and I are competent in many areas of life, but clearly home improvement is not one of them. Perhaps if we had assessed our capability in the way we assess management teams in QV portfolios, we might have saved ourselves time, money and bruised egos.
COMPETENCY IS KEY
A famous piece of investing advice goes something along the lines of, “Invest in businesses that are so strong even an idiot can run them because sooner or later, one will.” We agree that franchise is an important component of investment success, but we also contend that management capability is crucial in achieving good outcomes.
The importance of management is cemented in our investment philosophy – we buy portfolios of enduring businesses run by capable, committed, and candid people. In assessing competency, we look at what management has accomplished, what their background is, and lastly whether individuals possess the right skills to execute the company’s strategy. We try to meet with senior management whenever we can. It helps us understand where management strengths and interests lie, and how their skills will help carry out the company’s stated strategies.
A BETTER LOBLAWS UNDER ROBERT SAWYER
My colleague recently wrote about the strategy refresh that has taken place at Loblaws, a long-term investment in our Canadian large cap strategy. Amidst the company’s recognition that it was not performing to its full potential, we viewed Robert Sawyer’s appointment to the role of Chief Operating Officer very favourably.
Robert Sawyer was a former executive at Metro, a grocer known for consistent operational excellence. We were confident his appointment would elevate the overall competency of the Loblaws management team, and it was upon this announcement that we added to our investment in early 2021.
Since then, Loblaws has demonstrated significantly better operating outcomes, leading to strong earnings growth (and share price performance). We believe this is an example of how important it is to consider whether management teams have the appropriate competencies to succeed.
PROMISING DEVELOPMENT AT BANK OF NOVA SCOTIA
Bank of Nova Scotia has underperformed within its peer group for several years, partly driven by poorer execution at the senior management level. The bank announced the retirement of Brian Porter and the appointment of Scott Thomson in September 2022. This was quite an unusual event since CEO changes at the largest Canadian banks almost always involve set succession plans and promotion from within rather than the recruitment of outsiders. However, we remain cautiously optimistic.
Prior to his appointment at Bank of Nova Scotia, Scott Thomson was an agent of change at Finning International. During his tenure at Finning, he was able to meaningfully improve the company’s economic cyclicality and grow its profitability metrics. While Finning is a much smaller and less complex business than Bank of Nova Scotia, we think his track record as an agent of change will nonetheless aid Bank of Nova Scotia in improving its performance.
COMPETENCY SUPPORTS QUALITY
Assessing management competency is a very important component of our investment process. We believe the right management team can noticeably alter the overall quality of a business.