Chapter 4How Stewardship Affects Economic Moats

Contributed by Todd Wenning, who oversees Morningstar’s equity stewardship methodology

Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.

—Berkshire Hathaway, 1994 shareholder letter

Prudent capital allocation is more important today than ever before. Even for successful firms that have made it to the corporate mountaintop, rapid technological advances, globalization, and the relentless pursuit of economic profits have dramatically shortened the length of time companies can expect to remain on top. According to consulting firm Innosight, the average lifespan for an S&P 500 component has shrunk from 61 years in 1958 to 25 years in 1980 to just 18 years in 2011. In this increasingly Darwinian corporate landscape, then, it’s absolutely critical to understand how effectively a company’s management team allocates shareholder capital toward moat-widening projects and investments while balancing returns of shareholder cash through buybacks and dividends.

Meet Our Stewardship Methodology

At Morningstar, analyzing how effectively a company’s management team allocates its capital is at the heart of our stewardship methodology. We have long believed that effective management cannot constitute a moat in and of itself, because we’re looking for structural attributes of the underlying business when assigning moat ratings, and by definition, a great management team could ...

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