Thursday, 20 February 2003 8:30 am
Stanley Gold, CEO of Shamrock Holdings, wrote in the Manager's Journal column of the Wall Street Journal on Tuesday:

"At the beginning of the 20'th century managers and directors of corporations were primarily concerned with the deployment of labor.  By the mid-century, the job of managers and directors was to determine the best way to allocate capital.  Today, the focus is on the products.  Microsoft's success is not that it has the cheapest labor or the best capital allocation plan (it has neither), but rather that its products and services are terrific and fill a specific need of their customers.

"Accordingly, directors must have more than a passing familiarity with a company's products/services. Professional directors often have little genuine familiarity with their company's products and services.  Age, socio-economic position, gender, and lack of technical or scientific skill make this difficult. How is a director with no scientific background to understand the complex formulations in biology, physics, or engineering, or one without manufacturing experience to assess the quality of children's merchandise?"

Although Stanley Gold's column was about the changing requirements for directors in modern corporations, his analysis applies equally well to the managers of those corporations.  As I pointed out here on February 3, most of the people currently in charge of our high-tech corporations and government agencies do not have the background and education to understand technology.  In only eight sentences, Stanley Gold explains both why we have become used to this type of technical incompetence at the top of our corporations, and why it is no longer in the shareholder's interest.

Our most modern corporations are increasingly knowledge-based, and the knowledge involved is increasingly technical.  The people we have put in place to run them and to represent the shareholder's interest on their boards increasingly need to have a solid understanding of the real technical opportunities and limitations of the company's products and services.  Skills in labor deployment and capital allocation, while still important, have become secondary.

Many companies, large and small, new and old, public and private, are currently under-performing because people with the obsolete skills are running them and are on their boards.  Careful consideration of skills and backgrounds of the management team and the board of directors should be part of every investor's due diligence process.