I recently read an interview in Inc. Magazine on leadership and people management with Bob Sutton, a Stanford professor.

Sutton’s audience is mainly corporations and other businesses, but his comments are directly applicable to the investment management business. After all, whether we like it or not, the investment management business is still a business that employs people. Even if you run a small firm with 1 employee (not including yourself), you still need to manage your working relationship with that other individual (whether he/she be analyst or partner).

The article starts off a little slow – feel free to skip directly to the section starting with the word Authoritarian. From there, it’s all good stuff. Some highlights include:

• The best “coaches have to be schizophrenic. There are prima donnas you have to make feel terrible to get them going. And other players who lack self-esteem that need to be built up. So, half the time, he’s being an asshole, and half the time he’s being a nice guy. That’s because he really understands the people he works with.”
• The best leaders are “moderately assertive” and are “good at reading a situation to know when to turn up the volume in terms of getting in people’s faces” and when to get out of the way.
• Research has demonstrated that people prefer hierarchy to anarchy. In most instances, a good leader considers input from others but ultimately steps up and makes the decision.
• Leadership doesn’t mean absolutely having to make a decision for decision’s sake, and that the lack of decision-making is okay in certain circumstances, such as when there are no good solutions available to a problem.

A portfolio manager needs to be able to effectively manage and motivate his/her team to achieve results. Currently, compensation is the most commonly used management and motivation tool in our industry. But the effectiveness of that tool only goes as far as a higher offer elsewhere – hence the high turnover rate at some firms. A team that is continuously turning over is disruptive to the investment process.

Buffett understood, very early on, the importance of managing and motivating people through praise and appreciation (more details to come in a future article). There are undoubtedly other methods that also work well. PM Jar will attempt to feature more articles in the future discussing effective team management methods relevant to portfolio managers.