Thursday, December 6, 2012

Meeting the Professionals: the COO

Meeting the Professionals: the COO

Portfolio managers are usually the founders of money management firms and anoint themselves as CEOs.  They’re the ones with the investment idea or track record that’s going to amaze investors, so they get the top job in the firm.  There’s just one huge problem with this picture.  Most portfolio managers are among the worst business managers on the planet.  While they know something about identifying an attractive business or evaluating a management team, very few of those lessons find their way into their own businesses.  Admittedly, there are a few exceptions.  For the most part, the business would function far better if the founder stuck to portfolios and didn’t try to run the company.

In the formative years of a money management firm, the ineptness of the CEO as a business manager isn’t much of an impediment.  So long as there are just a handful of employees and clients, the business can rumble along.  However, soon thereafter most money management firms become highly dysfunctional.  Every marketing pitch, client presentation, or personnel matter turns into a crisis.  The portfolio accounting system, if there is one, ceases to function effectively.  On most days, a long line stretches outside the office door of the CEO, and he spends less and less time managing money and more and more time putting off critical decisions.
Music Meeting (2007)

If the CEO has any sense, he’s going to hire a chief operating officer.  A good COO is probably the most valuable person in a money management firm. When I was selected to be President and CIO of TradeStreet Investment Associates, the first thing I did was to beg my friend Rich Gershen to relocate to Charlotte.  I was smart enough to know that I’d turn TradeStreet into a quagmire if left to my own devices.  I’m not sure if Rich would agree, but I tried to stay out of his way as much as possible.

The COO’s job is to make sure things don’t go wrong.  If there’s a disgruntled employee, the COO has to avoid a discrimination lawsuit.  If an SEC audit unearths a compliance violation, the COO has to come up with a remedy.  If the portfolio management system fails, the COO has to have a back up plan.  If the marketing guy gets an offer from another firm or throws a hissy fit over a change in his sales territory, the COO has to calm him down.  The list of thankless tasks goes on and on. 

Possibly the hardest part of the job is signing off on checks.  The COO knows exactly how much the portfolio managers and marketers are making, and it’s a lot more than the COO.  While the big shots are jetting off to meetings, the COO sits in his office approving travel expenses.  He sees the receipts for the private jets, limos, and entertainment along with the creative explanations.  And, when the COO says that he needs to hire a CFO to manage the financials or a head of compliance to deal with regulations and audits, he’s reminded, time and again, that he’s a cost center eating up the business’s hard earned profits.

Why does the COO need to expand his staff?  As a money management organization becomes larger and more complex, the operational side of the business requires all sorts of specialists.  More importantly, the COO quickly discovers that meetings and phone calls with the CEO consume a huge portion of his day.  When the COO took the job, the CEO promised him autonomy.  The CEO/founder/portfolio manager just can’t help himself.  Remember he’s a lousy business manager to begin with.  Trust me, he’s going to meddle in and second-guess every operating decision.  As a result, the COO is going to babysit the CEO and need a staff to get the work done.

Why would anyone take this role?  As I mentioned, it pays far less than some of the other key positions in a money management firm.  However, it pays a lot more than being the COO in any normal business.  And, perhaps one day the founder will relinquish the reins and let the COO run the company.  The COO can dream about that day.

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