Who Are These People Anyway?

Experienced allocators of capital often remark that, over time, they have come to appreciate that the “people” part of the analysis of an asset manager is what matters the most.

Why, then, is so little time, money, and effort spent on trying to help those doing due diligence get better at evaluating the human capital of an organization?

Understanding individuals

Often, the “people” section of a due diligence report is focused on biography:  lists of details and/or narrative descriptions of the backgrounds of the individuals being put forth as central to the success of the strategy under review.

A kind of mental accounting occurs:  how many are from top schools, how many have been at premier organizations, how much experience do they have, etc.  And, if you say to one of them in an interview, “Tell me about yourself,” you are likely to get all of those details in response — and usually nothing about who they really are.

The goal should be to understand them as best you can, but the lack of unlimited time and the self-imposed need to prioritize investment-related questions cause little if any progress to be made in that direction.  Instead, you should strategically pursue the human dimension in your interview plan, and have the background and tactical tools at your disposal to make the effort worthwhile.

Carving out time to learn about these matters is the first step.  You can gain knowledge through training or self-education on relevant topics.  Among them are such areas as personality types, behavioral patterns (and disorders), cognitive versus social differences, and emotional intelligence.  Doing so leads to greater awareness of the human dimension that should infuse your interviews and evaluations.

Those interviews need to include questions that surface, to the degree possible, the real person, not the one that is marketed to you.  Improved interviewing techniques can yield more discoveries; it starts with the willingness to ask questions that provoke answers which reveal more about the interviewee than what the biography recounts.

Greater awareness will help you to judge the self-reporting by those whom you interview.  How open are they?  Can you foster greater openness?  How accurately are they presenting information about themselves and about their organization?

Interviews are performative encounters.  You need to judge how much impression management is going on and how accurate a picture is being painted for you.  While studies have shown that people on average aren’t good at detecting lies and deception, a broad range of uncommon questions may produce some evidence of that as a byproduct (in a way that a standard discussion about a favorite stock never would).  You may not uncover a fraud, but diagnosing a pattern of image enhancement may be an important part of the mosaic that you are seeking.

Another outcome of this pursuit is the formation of your own beliefs and preferences about individual characteristics that you think add value or detract from it.  Take narcissism.  Is that a positive or a negative quality in a portfolio manager?  In a chief investment officer?  In a CEO?  Why?

People offer different answers, but being able to think in depth about those kinds of questions is an advantage, even if they lead to decisions that cause you to avoid a manager with whom others find success.  You are playing the odds based upon what you know and what you believe will work over time.

Teams and organizations

Even teams or organizations that are highly dependent on one individual (or are perceived to be essentially the product of that individual) rely on collective action.  Therefore, the next step is moving from the human dimension to the social dimension.

Assessing each of the individuals who make up an organization in the manner described above — one on one — would provide great insight into the collective capabilities of the whole, but that’s impossible for all but the smallest firms.  However, a due diligence effort should be based upon that principle.

If the goal is to understand the people and how they come together, then the ideal is to interview a selection of those involved who (as a group) can provide insight into the human and social dimensions, while you are learning about the investment one too.  That group should include some at the heart of the investment process, as well as some on the periphery of it (who often provide a better perspective of the cultural workings of the organization).

For various reasons — time constraints, tradition, lack of training, the allure of investment discussions, impediments from the firm being vetted — many due diligence encounters fail to go deep on people-related factors.

Ultimately, you need to make judgments about the capabilities of the collective — be it at the team level or the organization level — and its performance.  Not performance in terms of the read-what-the-numbers-say performance, but how, why, and in what ways they succeed and fail in their goal of working together to make better decisions.

As when judging the interests and motivations of individuals, a broad base of knowledge, good interviewing skills, and a willingness to explore the social dimension in different ways allow you to unveil things that others miss.

Philosophy and choices

One go-to question for due diligence analysts to ask of key leaders in an organization takes this form:  “Why have you made the choices that you have regarding X and what is the philosophy behind it?”  X can be structure, process, incentives, or anything else — including all kinds of people-related issues.

At times, they really don’t have an answer, which ought to tell you something.  Or the professed theory doesn’t match up with the actual implementation, opening up another line of inquiry.  Plus, if you’re versed in the broader issues and principles involved, your knowledge may eclipse theirs, something that’s not common in these kinds of interactions.  It may even lead to a revealing discussion that otherwise wouldn’t have occurred.

While conversations on these topics are most frequent with the powers that be, the questions can be asked of others in slightly different form, regarding how the choices represent (or don’t represent) the broader philosophy that’s espoused internally and externally.  Those can be illuminating too.

Objective

The grade given to the “people” component of a manager research assessment is often simply drawn, without the kind of analysis that provides explanatory depth.  Going beyond that requires new avenues of learning and new investigatory techniques.

If this really is a people business, as everyone says, then getting better at evaluating people as individuals — and understanding the dynamics of how they come together in common purpose — needs to be elevated to a primary role in manager selection, so that it is properly balanced with investment concerns.

 

Several modules of the due diligence course available in the Academy deal with the issues discussed in this posting.