A few years ago, my students and I visited with Warren Buffett in Omaha. One of the students asked him how he chooses managers. The co-founder and chairman of Berkshire Hathaway said that it was easy: He said I take them for lunch and, if I realize they are there for the money, I do not hire them.
Read interviews from the CEOs: Do they make projections that are off actual performance? Here’s an example: The ex-CEO of General Electric, Jeff Immelt, gave an interview three weeks before the company announced earnings and made a forecast that was way off the actual numbers. While GE was too complex, and difficult to manage, Mr. Immelt still had a credibility problem.
Running a commodity business will lead the company into bankruptcy if the CEO does not understand the business or will save the company if they do. A case in point is Denis Durcotte, who had deep knowledge of the business, and whose hiring saved a struggling Algoma Steel from bankruptcy. On the other hand, running a business with barriers to entry, a manager poorly qualified to run the business will diminish the franchise but will not inflict mortal damage, as Mr. Buffett likes to say.
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