Management as an alpha indicator

Colby Howard's journey from investment banking to co-founding Paragon Intel is a testament to the power of unconventional career paths. After a disillusioning stint in finance, Howard found himself at a crossroads.

"I realized, A, I didn't like [investment banking]. B, I wasn't that good at it," Howard candidly admits. "The scaffolding of everything I thought I was going to do with my life fell apart."

This realization led Howard to an unexpected opportunity: co-founding Paragon Intel with a hedge fund manager who envisioned a revolutionary approach to quantifying management's impact on company performance. The goal was ambitious yet clear: to develop a data-driven method for predicting corporate success based on leadership capabilities.

The Science of Leadership: Cracking the Corporate Performance Code

At the heart of Paragon's methodology lies a deceptively simple insight: past performance is the best predictor of future success. However, context is king.

"The highest likelihood of success for any executive is if they've done it before," Howard explains. "You are joining a company that needs X, in an industry with Y dynamics. What about those line up with your experience?"

One of Paragon's key indicators is its ManagementTrack rating system, which scores executives on a scale of 0 to 10, considers three key factors:

1. Fundamentals: for companies they’ve run in the past, what do sales, margins, and cap structure say about their skill set?

2. Alpha: how did their companies' stocks perform against competitors?

3. Capital Allocation: What’s their experience allocating capital? Is it mainly through buybacks, dividends, CapEx spend, or acquisitions?

Mapping this onto the company they are currently running has yielded impressive results. According to Howard, "If you only look at executives individually, you get 8% alpha on average per year. If you make a company rating, you get a percentage and a half more by weighting the CEO at 60%, CFO at 20%, COO at 20%."

Beyond the Boardroom: Unexpected Applications of Executive Intelligence

While Paragon's primary focus has been serving investors, the potential applications of their data extend far beyond the trading floor. Howard hints at emerging use cases:

1. Executive Search: "Are we going to become an automated executive search firm? I think there's definitely something there," Howard muses.

2. Competitive Intelligence: Corporate clients could use the data to prepare for high-level meetings and negotiations.

3. Board Decision-Making: Helping boards make more informed hiring decisions based on quantifiable data.

4. AI-Powered Insights: Leveraging artificial intelligence to extract even more value from their vast database of executive interviews and performance data.

Howard explains, "Using AI, we've been able to look at traditional data and say, ‘paired with our data that no one else has, what unique perspective can we have on every single public company?’"

The Future of Corporate Governance: Data as the New Compass

As the line between public and private company data continues to blur, Paragon is poised to expand its reach. Howard acknowledges the potential: "There are more and more people who are really cracking private [company data] and the cleaner that data gets, the more likely it is that we run our engine on this massive data set."

This evolution could dramatically change how investors, boards, and even regulators approach corporate governance. By providing objective, data-driven insights into executive performance, companies like Paragon are ushering in a new era of transparency and accountability in corporate leadership.

Leadership can make or break an organization, having a quantifiable way to assess executive capability is invaluable. As Howard puts it, "This is just an entirely different way of looking at company performance."

The future of corporate governance is here, and it's powered by data. Companies that embrace this approach may find themselves with a significant competitive advantage, while those that ignore it risk being left behind. As we continue to unlock the potential of executive intelligence, we may discover that the key to organizational success has been hiding in plain sight all along – in the data that tells the story of our leaders.