- Paragon Intel, an alternative-data provider known previously for its jet-tracking data, launched ManagementTrack a little over a month ago with the goal of becoming the "Moody's or S&P of management teams."
- The new product quantitatively evaluates executives based on how their decisions have impacted a company's stock and growth.
- The company's founders have been thinking about this product for years after seeing how executives are evaluated.
- "It was a lot of 'yeah, I met with the CEO, and I got a good read,'" said Colby Howard, president of Paragon Intel.
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When the pandemic hit in March, airlines were among the obvious set of companies that would be immediately hit.
Stay-in-place orders and fears of being locked inside with strangers for hours-on-end greatly diminished the pool of potential travelers – and sent stocks tumbling. These companies though aren't expected to be kept down forever, even though the pandemic's end date is still to be determined.
For investors trying to determine which airline would bounce back best, Paragon Intel — an alternative-data provider with various corporate governance tracking products —believes examining the C-suite is a great way to get an upper hand.
The company's newest product, ManagementTrack, quantifies executive performance for the top three executives at every Russell 1000 company based on everything from how their decisions have impacted stock performance to how their personal buying and selling of company stock has impacted returns for investors. For airlines, the strongest C-suite belongs to Southwest, according to Colby Howard, Paragon's president.
"As COVID hit, If you were looking for the strongest airline investment in such a turbulent environment, a quick ManagementTrack perusal would show that Gary Kelly, Southwest's CEO, had the highest performance score among airline CEOs and Tammy Romo, Southwest's CFO, had the highest score of any airline executive," Howard told Business Insider.
The results have matched the stock performance. While Southwest has lost a fourth of its value since the beginning of the year, the stock prices of competitors like Delta, United, and American Airlines have fallen by at least 45% during the same time period —with the market values of United and American at less than half of what they were at the start of the year.
The alternative data industry — a rapidly growing sector expected to top billions in revenue in the coming years — has made a habit of quantifying things that were once purely qualitative. For Paragon, that includes what a good executive looks like.
The data company's founders have buy-side experience, and saw firsthand how the evaluation process for executives can be as simple as a feeling.
"It was a lot of 'yeah, I met with the CEO, and I got a good read,'" said Howard.
The reality, Howard says, is that people can get distracted by flashy resumes and easy-going attitudes, and miss the bigger picture.
For instance, more than 100 executives are hired every year by Russell 1000 companies from outside their firm, and investors can easily be taken by a big name.
Software-as-a-service company CDK Global, for instance, hired former Intel CEO Brian Krzanich in late 2018, which Howard says looks like a big win on paper. But Intel's performance under Krzanich's leadership lagged behind its rivals, and he was the subject of an insider-trading civil lawsuit after he sold $24 million in Intel stock after learning from Google that a computer chip had a vulnerability. Intel said the sale was pre-planned, and that the company learned of the chip issue long before the stock was sold.
Kzarnich then abruptly resigned in 2018 due to a relationship with a subordinate.
"That shiny Intel veneer fades pretty quickly as you realize there's more work to be done if you want to test his readiness for the CDK job, or you realize there's an opportunity for a short," Howard said.
CDK's stock increased slightly after Krzanich's hiring was announced, but started to fall in February before the virus had made its way to the United States. The stock currently is down roughly 15% from where it was when Kzranich started. CDK did not respond to requests for comment.
Paragon has big dreams for the new product, with the goal of expanding it to late-stage private company executives eventually. We want to be "the Moody's or S&P of management teams," Howard said. Similar to how bonds are rated, Howard and the team at Paragon believe that executives can be similarly evaluated on their past performance and overall ability (they assign a numerical score to CEOs, CFOs, and more, which is made up of historical data, public records searches, hiring track records, and more).
One big driver of demand the company envisions is the increased interest in ESG investing. One of the biggest hold-ups for many asset managers looking to possibly develop an ESG strategy is the lack of hard data around the goals.
Morningstar purchased environment-focused data provider Sustainalytics in April, but social and governance data have been harder for investors to nail down.
"There's no real quantification of the decision-makers at companies," Howard said.
"This is high stakes, and for some reason, for the people shaping these companies, there's little scrutiny."
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