1 Key Thing Every Great CEO Needs

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If you were investing in a company, what 5 traits would you want "your" CEO to possess?

Here are mine off the top of my head:

  1. Intelligence of the right/left-brain mix type 
  2. Hard-working in a focused way
  3. Integrity
  4. Positive
  5. Respectful

I don't know Berkshire-Hathaway's (NYSE: BRK-B) legendary leader Warren Buffett -- though my grandfather might have bumped into "his people" while growing up in Omaha -- but from what I've read, he'd pass my 5-point test with flying colors.

Apple's (NASDAQ: AAPL) founder Steve Jobs would likely score a 4. I've written positive articles about Apple, including highly complimentary things about certain Jobs' traits. Nonetheless, it's widely known that he regularly demeaned employees. Exacting and tactfully critical are one thing; demeaning is another. So, he gets a fail on #5. Jobs succeeded not because of this trait, but despite it, in my opinion.

Your 'top 5' list likely overlaps with mine, and perhaps includes one I'd like so much that I'd give one of mine the boot. But besides traits, there is one 'thing' I want the CEO of any company I'd consider worthy of investing in to have:

A trusted and respected confidante who feels comfortable telling him/her: "THAT IS A STUPID IDEA!"

Of course, this is what a good Board of Directors should do -- though more tactfully -- regarding poor-idea business moves. However, Boards are often lap-dogs, comprised of people who don't want to ruin the prestige and easy money things they have going for them. They're not "lifers" like Supreme Court Justices, so while it's an unfortunate situation, it's understandable. This is why it's important to consider Board strength when making investment decisions. 

Here's an example that shows the need for the type of confidante described. It's à la Dickens' style. But, unlike Scrooge, when we're transported back to 'CEO Decision Past,' we'll be able to interact, not just observe.

Netflix (NASDAQ: NFLX)

It's July 2011. A Netflix subscription costs $9.99 a month for the unlimited Internet (streaming) and DVD (rental via mail) package. Netflix has 24.59 million unique subscribers in the U.S. (June number).

Look over there -- it's a Netflix subscriber happily skipping as he returns from his mailbox, red envelope in hand. Subscribers are happy. Heck, they're ecstatic, they love those envelopes. And that feel-good factor has spread to Netflix's video streaming, as well as the company itself. 

Netflix's stock price is flying high at just under $305 per share (which turns out to be its peak). So investors are happy. It's a Happy-fest.

And there's Founder-CEO Reed Hastings.

Enter us. 

REED: We're the big player and people love our service, so I plan on increasing prices. I want to move subscribers toward the more profitable streaming, so plan on separating the DVD and streaming options, and structuring the pricing to help achieve that goal. I'm planning on $7.99 for the streaming plan and $7.99 for the DVD rental one. These are still low prices and great deals.

US: That is a stupid idea! Reed, that's a 60% price hike! You can't look at it as a low-dollar price hike; you have to consider the percentage. You will %$#@ off people with a 60% price hike, especially on rather short notice. Not only will we lose some subscribers (even if they eventually get drawn back), but it will create a lot of ill-will. Investors will be less inclined to give you a bigger leash, like they do Amazon's Bezos, who has built a lot of goodwill in the investing community. Besides, we're #1 now, but there are competitors chomping at our heels -- Coinstar and Amazon, among others. If you do raise prices, at least do it in steps and give more  advance notice.  

What happened...

As many know, Hastings did as described above. He needed someone to save him from himself. Either nobody told him "that is a stupid idea" or, if someone did, it wasn't someone he trusted and respected enough to listen to. (Yes, for some CEOs, "everyone" would fall into this category.) There were a lot of angered subscribers, who viewed the move as unwarranted, excessive and inconsiderate. 

Netflix lost nearly 1 million subscribers by the end of the third quarter of 2011. And its stock price plunged almost 80% from July to November.

There are endless examples. Former Yahoo! (NASDAQ: YHOO) CEO Scott Thompson's resume fiasco -- which resulted in his leaving the company -- comes to mind. Thompson could have used a personal confidante, whom he trusted to bare his soul, to advise him that misrepresenting his education in documents filed with the SEC would be a stupid idea. (To be fair, Thompson claimed it was an inadvertent error. That scenario still points to the need for a trusted confidante -- one whom will help a potential CEO "vet" him/herself prior to being selected as a CEO.)

Buffet has given a lot of credit for his success to Charlie Munger, Berkshire's Vice-Chairman, who also appears to be a good friend. I'd imagine Munger is comfortable telling Buffett, "That is a stupid idea!" And I'd bet 'The Oracle of Omaha' earns the 'Oracle' in his moniker by being wise enough to listen when he hears that message.

Every CEO needs a Charlie Munger, whether inside or outside his/her company.

Investor Takeaways

CEO, Board of Director and other Corporate Governance characteristics are critical, but often overlooked, factors when making investment decisions. They should not get lost among the quantitative analysis.

In addition to considering the usual Corporate Governance factors, you might consider whether the CEO seems to have the personality and wisdom to listen to a trusted and respectful advisor. If not, there's a good chance his/her arrogance -- or just humanness, as we all have lapses of judgment -- will lead to a costly (for investors) misstep.

BAMcKenna has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Berkshire Hathaway, and Netflix. Motley Fool newsletter services recommend Apple, Berkshire Hathaway, Netflix, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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