When Management Must Go

Jason Stipp: I'm Jason Stipp with Morningstar reporting from the Value Investing Conference in New York. I'm here with David Nierenberg; he's from D3 Funds. They invest in very small, or micro-cap, stocks and they become collaboratively involved with management. I'm here to talk to him a little bit about management and the downturn. Thanks for joining me, David.

David Nierenberg: Good morning, Jason.

Stipp: So, today you talked a little bit about "a clean mess" and "a bad mess" and how you are involved with management companies. When do you draw the line and when do you say management needs to go--management needs to be replaced versus we can work with existing management? When is it that management just has to be replaced and has to go?

Nierenberg: First I'll say generically that the people decisions that we make are, of course, the hardest decisions that we make. If you're making a decision based on numbers and those are good numbers, you can lay them out, you can make a simple decision. I would say that when we're wrong about an investment, most of the time it's because we're wrong about the people. Some activities, some behaviors are so over the line that in those rare cases when they do happen, it doesn't require a lot of reflection if it's so outrageous.

You know, if someone tells me that 75 percent of cash is invested in something and it's invested in something else, that's pretty black and white. That's not hard. But if the issue instead is what I'll call underperformance, failure to focus on the right strategic issues, failure to execute the strategy cleanly and well, a person is entitled to some time and to some feedback and to an opportunity to self-correct, I believe. I would certainly want to have that blessing as well.

But after you've gone through that more than one time involving similar issues and similar people, then I do think that one has an obligation to be proactive about making a change. A well-paid senior executive position is not an entitlement. It is a trust. It is a role of stewardship. I would say that looking back on my 28, 29 years of board service, the funny thing to say is I don't think I've ever fired somebody too soon.