How to Assess a Company’s Management
The company’s management is in charge of making strategic choices. They may be likened to a ship’s captain, who guides people to consider different aspects that guarantee a safe journey but does not physically operate the vessel.
The management of the firm is in charge of generating value for the investors and operating the business in their best interests.
But since managers are human, it is very unthinkable that they will behave only in the best interests of the shareholders and not their own interests.
When a manager’s interests diverge from shareholders’, a problem occurs.
Therefore, it is preferable to link management remuneration to shareholder interests in order to resolve this conflict.
- Purchasing and investing
Instead of participating in conglomerate construction, it is preferable to be connected with businesses that love to stay true to their core skills.
Additionally, businesses that sell their non-core activities at reasonable rates are demonstrating sound management. Put simply, these businesses make an effort to focus on their strengths.
There are several instances where businesses that make a lot of acquisitions to diversify their operations wind up eroding the wealth of their shareholders.
- Over time, enhancing shareholders’ wealth is the responsibility of compensation management.
But it’s best to view with mistrust if the management lavish themselves with excessive sums of money, especially during difficult circumstances.
It’s challenging to decide what amount of pay would be too much or too little.
However, to get a sense of the sector average salary, a peer comparison would be quite beneficial.
If there are large differences in the salary of managers in the same industry, you would be quite skeptical.
- Insider purchasing and stock buybacks
Since insiders have knowledge that other regular investors do not, insider buying is frequently viewed as a good thing.
However, the duration of the management’s share holdings should be the main emphasis.
The buyback follows the same reasoning, and the management’s most likely response would be that it makes sense to deploy the company’s resources.
On the other hand, a repurchase would raise shareholder value if the firm is indeed cheap.
- Debt amount
Debt management and management frequently go hand in hand.
While poor management and debt can have disastrous consequences and have the potential to wipe out shareholders’ money, good management and debt can build value for shareholders.
If a company has a lot of leverage on its books for its industry, you should be extremely wary. For example, a company that works in a capital-intensive and highly cyclical industry shouldn’t have a large debt load because this might cause inherent instability in the company.
On the other hand, companies in established industries ought to take on a certain level of debt as it might cut their cost of capital.
- Objectives and Plans
A competent management team should lay forth the company’s objectives and plans.
A clear mission statement is an indication of effective management, thus you should review the company’s mission statement.
However, it is best to view such management with distrust if the mission statement is filled with trendy buzzwords and hi-fi language.
Therefore, in order to predict how well a firm will function in the future, you need constantly assess its management practices.
- Duration of employment
One significant factor is the length of time the CEO and upper management have been connected to and employed by the business.
For Warren Buffett, finding steady management that is committed to their company over the long run is one of the most crucial investing criterion.
To obtain the majority of the management information, see the Management Discussion and Analysis (MD&A).
You can consult the press release and the company’s most recent investor presentation in addition to the Management Discussion and Analysis (MD&A).
You may examine the achieved outcomes from the most recent MD&A to see whether the company’s management is viable and delivers on its commitments.
You can compare the current and previous MDAs to have a better understanding.