Finding Good Company Management
Is the key to successful value investing!
Evaluating company management is difficult, but important from a value investing standpoint
Most value investors realize that it's important for a company to have a good management team including successful rather than overpaid CEOs.
Investors can't always be comfortable with a company by only looking at financial statements.
Strong management is the cornerstone of successful companies as management ultimately makes the important strategic decisions, such as capital allocation.
The management of a listed company is in charge of creating value for shareholders. But it is unrealistic to believe that management only thinks about the shareholders. Managers are also looking for personal gain.
Problems arise when the interests of the company directors are different from the interests of the shareholders. Conflict is likely to occur unless the compensation of the management is tied to the interests of shareholders.
Strong stock performance alone doesn't mean you can assume the management is of high quality. There are a number of other factors I consider.
One good indicator of high quality management is how long the CEO and top management have been serving the company.
One of Warren Buffett's investment criteria is to look for solid stable managements that stick with their companies for the long term.
A veteran CEO is preferable to a newcomer when it comes to assessing management risk.
Other Management Indicators
What are the kind of goals the management has set for the company? It is not a good sign if a company fills its mission statement with the latest corporate jargon.
It is a good sign if the senior executives are heavily invested in the company over the long term. Watching directors selling shares to make a quick profit is not a good sign.
A share buyback may be a good sign if the company is buying back undervalued shares, but otherwise it may destroy shareholder value.
I think about this when a share buyback is announced to judge how careful the management is being with my money.
Good management pays for itself over time by increasing shareholder value. But knowing whether the levels of CEO salary and CEO bonuses are too high is a difficult thing to determine.
I look to see whether there is undue focus on remuneration. For example, if the remuneration committee meets more than the audit and risk management committee, this could be a bad sign.
One thing to consider is that managements in different industries receive different remuneration.
I like to see that the CEO of a company I am interested in receives a comparable compensation to his or her industry peers.
I am suspicious if a manager is given large short-term incentives, particularly if the company's performance is not up to scratch.
And more so if senior executives are providing themselves with non-recourse loans - loans that don't have to be repaid if the share price retreats.
Management Stock Options
Stock options can be a contentious issue. Some time ago, options were seen as the solution to ensuring that management increased shareholder value.
In more recent times they have been open to abuse. Options do tie compensation to performance, but not necessarily for the benefit of long-term investors.
Stock options aren't free, and usually dilute my shareholding. The question I try to answer is whether management is using options as a way to get rich.
Alternatively, are they actually tied to increasing value, as measured by high, increasing, or stable return on equity (rather than share price), over the longer term.
There is no single means for evaluating company management. Financial results do not tell the whole story, but it is not too difficult to judge how shareholder-focused company management is.
Simply looking at how many times shareholders get a mention in company reports gives me some indication of where the management's focus lies.
The last thing that I would like to see in the company hierarchy is a 'CEO of the sofa' - or worse, CEO failures.
So I try to learn about the company insiders by reading articles in shareholder association reports, listening to interviews on TV business programs and by attending annual general meetings when this is possible.
All of these activities can provide valuable insights into company management, insights that are necessary to become a successful value investor.
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