Mark Zuckerburg rejected Yahoo’s acquisition bid for $1b in 2006. In Zero to One, Peter Thiel sighted this as a positive sign along the lines of a focused entrepreneur with a grand vision. I don’t know Zuckerburg personally so will have to take Thiel’s word for it. The truth is I’ll never know what he was thinking. Furthermore, I cannot comment on whether that was a good or bad decision. The facts are that Facebook went on to be an extremely valuable company dominating the digital ad markets after making a key acquisition of Instagram. Such is a result. But the decision could easily have been one of hubris that could’ve turned out badly.

After Yahoo failed to acquire Facebook, it rejected a $41b acquisition offer in 2008 from Microsoft and the core business was later sold to Verizon in 2017 for ~$4b. Some may say Jerry Yang made a bad decision here. I mean, maybe he had the same reasoning as Zuck and Yang believed in a grand vision. One can say it panned out in a weird way with Yahoo’s $1b investment in Alibaba back in ’05 paying off ~$40b after the wind-down in 2019. Once again, things could have worked out really different and I’ll never know what these people were thinking and why things transpired the way they did.

These are small snippets reminding me of the difficulty of evaluating management from results in the ‘wicked environment’ we call real life. Still, one can broadly say that investing alongside owner-operators makes sense purely based on the model of incentives. An owner-operator is aligned with the shareholder in regards to the operator being a shareholder as well so you are at least in similar boats. If the operator is also a founder, then I think it’s even better because of that upside benefit of having a vision for their baby.

This brought me to think about management’s competence.

I found a similarity in all podcasts interviews with VCs regarding every company and founder they talked about. The VC will tell you the founder/s are the smartest people they’ve ever met and compare them to Bezos (as if they all knew Bezos since high school). I must be late to the game but this really made me start to question most VC commentary on views of management. They're opinions…sometimes charged with incentives….and confirmation bias in some respects. Good or bad opinions? I can’t say. I don’t know who the VCs are comparing the founders with and I don’t know what they would say of the other founders in their portfolio.

Some say one can evaluate management by looking at what they’ve executed on in the past. If they said they would do XYZ in a conference call in 2013, did they end up doing it by 2019? Something like that. But, if one assumes the stock market is a forward-looking machine that unequivocally trusts management will be good on their word and execute on the promise in 2013, the price will reflect the endeavour, no? So, a failure to do so by 2019 should result in some price decline as the market is hit with disappointment. Maybe the market’ll have forgotten so it won’t care about unkept promises. But the prudent shareholder may use that to say “Oh, you cheeky management. I won’t trust you now!”

But what if management did try to execute and failed? What if they don’t share the failure? What if there is no public record of all the experiments they ran inside the organization? What if management made the best decisions with the facts they had but are hit with unfavourable outcomes? Are they dishonest and untrustworthy management? I’m not sure. It makes it harder and harder to evaluate them without truly knowing the inside process. Maybe some investors may get that look but I don’t think even people working inside the company will know and what makes an investor more special than an employee? My experience is that you don’t really get the nitty-gritty details on calls with management. But, maybe some do.

So, equity ownership aligns some incentive for me to trust the management to act in interests that would also favour me as the shareholder. As far as how execution goes, regardless of whether the outcomes of decisions are good or bad, it seems rather difficult for me to conclude if management is an all-star (aren’t we all looking to invest alongside all-star management?) or not.

Though a company is an organism with numerous moving parts where its successes and failures can’t be attributed to a single individual (i.e. the CEO), one particular variable the management has complete control over is their pay. Buffett is a great example of an operator with lots of ownership in his business and the man has a very reasonable compensation of $100k annually for ~30 years. Now, he also gets an extra ~$200k in other compensation to pay for his travel, etc… and the business is his life so… sure, I get it. There are also a number of leadership in the big tech companies with $1 salaries like Zuck, the Google duo, and Dorsey. Now, I think Zuck gets $100m in other compensation for security, travel, etc…. He must have an army around him for that kind of money.

I’m no owner of some multi-billion dollar company so it’s hard for me to understand the shit these individuals had to trudge through to get to where they are. Who am I to judge how much someone gets paid? No one really. But, I do believe someone who is incentivized not just by money but with some intrinsic motivation leading a business is crucial. Possibly one of the best motivators being the person has a lot of fun leading the business and that’s all they want to do. Great news for me as a shareholder.

In that regard, I would want to see management take ‘reasonable’ compensation. It’s a sliding scale but when I see Bezos take $81k annually from 1998 to 2020, I think that fits the bill. He too has travel and security paid for by Amazon and it’s about $1.6m. I guess Bezos’s bodyguards are cheaper than Zuck’s because he works out?

I think Bezos and Buffett are two amazing CEOs and possibly good anchors for what would be reasonable management compensation. At least, for management that seems to understand they are building a business for the long term and are in it to win it. They are comfortable not getting some equity compensation since they already own a fat amount of equity and they can look towards having that appreciate as their reward. The rest of what they do is for some intrinsic motivator. I don’t know if that is true. They say it is and I can choose to believe them or not. What convinces me that they are telling the truth is that their pay doesn’t include $100m in stock options. Not saying those who get paid $100m in stock options don’t do it for some intrinsic motivation but that’s what normal people like me would do and the absence of such normal behaviour is a signal for me.

As I think further about evaluating management, I’m not so sure how to discern if someone is great or not. I can conclude I like them based on what they say, seem to do through what the company does, what they read, what others say about them, and their philosophy. My bias immediately goes favourably towards CEOs who read Poor Charlie’s Almanack but I don’t know if that makes them great leaders, just that they have great taste.

What I can see is how much they believe in their company by the equity they own over time. I can guess how much they need to fund their life via their compensation and how much equity they’ve sold over the years. I tend to like people who don’t have extravagant lifestyles (it’s just bad taste for me). Then there is the compensation that seems to indicate some kind of “Yeah I have enough and I’m going to focus on building this business here.” I think that is an infectious characteristic that would percolate top down throughout the company culture. I mean, I can’t imagine someone who wants a "bling bling" lifestyle join Amazon or Berkshire. I imagine this would shrink the pool of management teams I am willing to trust by quite a bit but such actions relating to equity and compensation seem to be signals worth focusing on more than results that seem so out of management’s control.