How to ... Spot Great Chief Executives
By Kevin Kelleher

(Business 2.0) – Sizing up management talent is always a valuable skill, but to money manager Ron Baron and his investors, it's worth millions. As manager of the Baron Partners Fund--the best-performing diversified stock fund of 2004, according to Morningstar--Baron picks stocks largely based on his evaluations of companies' senior executives. A vote of confidence from Baron--known for hosting investor conferences where guests hobnob with his portfolio CEOs (and marquee entertainers such as Jerry Seinfeld)--is like a badge of Wall Street honor. We asked him to share the telltale signs of a great corporate leader. -- INTERVIEW BY KEVIN KELLEHER

What separates companies that will grow from the ones that won't is the executive in charge. But anyone can do what it takes to identify great CEOs.

First, look at public documents, like proxy statements. Are options going mostly to the top execs, or are they spread out among employees? Do salary and perks feel appropriate? You're looking for someone who's not just out to feather his own nest. In a letter to shareholders, Richard Reese, the CEO of [document-management company] Iron Mountain, declared that he gave options grants only to employees. The guy was basically saying, I won't take any because I want to use them instead to retain good people.

You're looking for someone who's smart and successful, so read about a CEO's background and education. But you also want honorable managers, because dishonorable ones will screw you just as badly as dumb people will. The hallmarks of honor are in a person's past. Take Butch Kerzner, CEO of Kerzner International, which operates resorts in the Bahamas. For eight years we have been an investor in the company, but a few years ago, the stock price fell sharply, to $24, and management was going to do a buyout. I thought the price was too low, so I said to Kerzner, "You're at a fork in your life, and you can be a very honorable, very wealthy man, or you can be a guy who takes advantage of his shareholders. It's your choice." Instead of going private, he had the company buy back shares at the low price. Now the stock is around $60 and Butch is seen as an honorable leader.

Great leaders make people want to do great things for them. When you walk into an office, you want to see happy employees. If your own people are rooting against you, you can't have a good business. A good example is Steve Wynn, CEO of Wynn Resorts, in which we have a significant stake. Before selling Mirage Resorts in 2000, Wynn hosted annual black-tie dinners to honor outstanding employees of all ranks. Lavish affairs costing upwards of $1 million and attended by luminaries like George H.W. Bush and Maya Angelou, they sent a message to staff: You're a valuable part of the business.

You can cut all kinds of corners to make your company look good in the near term. But your people are going to leave, and customers are going to find alternatives. Long-term success is about doing the right thing. Sure, sometimes we misjudge people. But it's OK as long as you're right most of the time.