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My Dad has just had the lenses replaced in his eyes and is free of spectacles for the first time in 78 years. He could get by with the old ones, but didn’t realise quite how much he hadn’t been seeing anymore, working on routine and habit instead of sight. A more literal example of a fresh pair of eyes would be hard to come by.
The process derived from managed replacement as opposed to response to a disaster. Similarly management change is often a form of evolution as opposed to a forced response to a catastrophe. As much as an historic bond of trust does strengthen the relationships between investors and management, after a period of time the fresh energy and approach can be a significant positive. David Hornsby went upstairs within Ideagen, empowering Ben Dorks; John McArthur at Tracsis handed over to Chris Barnes. Next year the long-serving CEO of D4t4, Peter Kear will hand over the reins to US VP Bill Bruno. In each case, not as a response to any form of disaster management, but a natural evolution which will, and has, benefited these businesses by bequeathing a fresh burst of energy and often most usefully and simply, a fresh pair of eyes.
Looking to further examples where we can see evolution based changes which are not yet appreciated, there is always the challenge that new CEOs do not have the equity participation that founders had, and so motivation is less in line with shareholders – a regional UK telco bank in the early 2000s epitomised the risk, with a CEO with the second highest non mining sector salary in small cap, and no equity participation bar options, delivering a statistically beautiful correlation between those two factors – salary high, equity low, and share price performance appalling. Salary high and equity low can be fixed, but a non-participating CEO is illogical. It does reinforce the benefit of a strong operating performance based LTIP, although we still remain anxious where they are purely share price driven, which is no recipe for long termism. The most convincing participation can come in time, in cash, and with positive deals.
The initial benefit of a fresh pair of eyes is energy and clarity of focus: look at Intercede under Klaas van der Leest, which is since up c.300%. There’s also the busy-ness of the fund manager, whose ears may prick up when the stock they’ve seen a thousand times but feel hasn’t changed, has a change. We spoke to investors about iomart yesterday, several of whom had not heard of them for years – but with the impetus of a new CEO, COO, CMO and relatively new CFO, energy abounds and was emphasised with Wednesday’s CMD. At <8x EBITDA, >90% recurring revenue, and the strongest margins in the peer group, there is a solid foundation already, which can yet be improved upon, in this case with a restoration of growth. Similarly, we met Mark Adams, fresh into Attraqt, with vision and enthusiasm; Greg Coticchia has taken the helm at Sopheon, as Andy Michuda focuses on strategy; K3 Business Tech combines the forceful drive and experience of Tom Crawford with the sector knowledge of Marco Vergani; Eleco is already seeing the benefits of its management refresh last year with an impressive 1Q, rising order levels and a new growth strategy in place. Our recent initiation on Parity highlights the fresh approach of the new management team there, focussing on sought-after data engineering skills to increase margin and differentiation in the competitive contract recruitment industry. Each of these present opportunities for positive reform and change – all worth a look, and a consideration of the benefit to forecasts of fresh revenue streams or managed cost efficiencies.
Leonardo da Vinci said people look without seeing and it's true. It's even more true as time passes and we see the same things we expect to see. When we get a new perspective, we can see what we really should have in the first place. My father may not be quite as wise as Leonardo but he certainly appreciates his new lenses.
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