An executive’s “financial signature” is the key to how he or she evaluates risk and reward to build company value.
All executives have two basic drives: to add value to products or services, and to deploy resources with a certain amount of efficiency. The first drive can be inferred by a business’s gross margin and the second by its relative indirect expenses. Together, the two numbers constitute an executive’s “financial signature.” There are four extreme categories of signatures: (1) gross margin and expenses are both high, (2) high gross margin and low expenses, (3) low gross margin and high expenses, and (4) gross margin and expenses are both low. The categories are labeled “venture capitalist,” “buccaneer,” “mercantilist” and “discounter,” respectively, and each has a characteristic set of financial behaviors.
Certain financial signatures are best suited for particular industries. Mercantilists, for example, are ideal for commodity markets with high fixed costs. Moreover, companies might need executives with different financial signatures at various stages in their life cycle. A startup, for instance, might be better off with a venture capitalist at the helm. Later, that same firm might need to fill its executive suites with discounters. No matter how capable the leader, a mismatch between an organization’s requirements and the actual financial signature of its CEO can lead to management problems, possibly even to company failure.