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How to Assess a Company's Management

When we look at companies, the quality of management is an extremely important aspect to consider.

Management drives strategy and the actions that the C-suite takes can make or break a company. When Bob Iger took over Disney the first time around, he did a tremendous job of growing the company, only to see it almost run into the ground by his successor, Bob Chapek. Iger is back but, he’s not faring much better because there’s probably some lasting damage from the two years that he’s been gone.

Another issue is, we seem to have this notion that founder-led companies are inherently better. Well, that’s not always true. Remember what happened with Adam Neumann and WeWork? Quite often, it makes sense to turn over the reins to someone with more experience and less emotional attachment to the company.

How do we assess a company’s management?

Assessing a company’s management is not a perfect science and the more you practice, the better you get at understanding what’s right and what’s wrong. Nevertheless, a few things we look for are:

  1. Financial Performance and Growth: Assessing the company's financial results over time, compared to peers, provides insight into management's effectiveness in driving growth and profitability.

  2. Operational Organization: The organization within the work environment indicates management's ability to plan efficiently and achieve strategic goals

  3. Employee Development and Satisfaction: High employee satisfaction and investment in development programs signal a management team that values its workforce, contributing positively to the company's culture and performance

  4. Stock Options and Insider Activities: Stock options and insider buying can provide clues about management's confidence in the company's future. However, short-term buying and selling by management may raise concerns about their commitment to long-term success

  5. Stock Buybacks: The context and execution of stock buybacks can reveal management's perspective on the company's valuation and their strategy for enhancing shareholder value

  6. Transparency and Communication: Management's openness about strategic challenges, missteps, and their approach to overcoming them is a hallmark of good governance. Transparent communication in both prosperous and challenging times builds trust with shareholders and stakeholders

Where do we get this information?

  1. Company Filings, specifically the Management’s Discussion and Analysis (MD&A). This should be an essential read for whatever company you’re researching

  2. Company Announcements and Investor Day Presentations

  3. News, analyst discussion - Always keep your ears open

Potential Red Flags when Assessing a Company’s Management

When evaluating a company's management, several red flags may indicate potential issues that could impact the company's performance and governance. Understanding these warning signals is crucial for investors, employees, and stakeholders to make informed decisions.

Again, this is not an exhaustive list, but some issues that could steer you in the right direction and help you avoid companies with questionable management.

  1. Aggressive Growth Strategies: Companies aggressively pursuing growth through acquisitions, rapid expansion into new markets, or setting overly optimistic targets compared to their peers might be taking on unsustainable risks.

  2. Equity Culture and Management Ownership: An overemphasis on stock price appreciation, particularly if management is significantly focused on short-term gains or if there's a rapid accumulation of stock and options by senior management, can indicate a misalignment of interests with shareholders.

  3. Character and Compensation of Senior Management: A cult of personality around the CEO, excessive compensation not tied to performance, lavish lifestyles, and a lack of a clear succession plan are potential management issues. High turnover or unexpected departures in senior management without credible explanations can also be concerning.

  4. Corporate Culture and Business Practices: A "culture of greed," where management compensation is materially more generous than peers, or a culture that penalizes internal debate and independent thinking, could be problematic. Aggressive sales and marketing practices, lack of transparency, and heavy use of lobbyists and lawyers might indicate deeper issues.

  5. Legal, Business, Financial, Ownership, and Tax Practices: Complex corporate structures, over-reliance on tax shelters, and aggressive financial leverage can be red flags. Changes in ownership or managerial structures and the inability or unwillingness of management to explain complex structures could signal potential issues.

  6. Lack of Focus on Core Competencies and Overpaying for Acquisitions: Straying away from what the company does best and spending excessively on acquisitions can dilute a company's value and focus.

  7. Receiving Lucrative Compensation Packages: Management receiving outsized compensation, especially when the company is not performing well, can indicate that they are prioritizing their interests over shareholders'

  8. Governance and Risk Management Policies: Failure to follow bylaws, inadequate conflict of interest policies, not regularly reviewing social media and sexual harassment policies, and neglecting to assess risks associated with lobbying, political activity, and partnerships can expose a company to various risks.

  9. Financial Instability Indicators: A reliance on short-term debt, refinancing risks, or complex financing arrangements can indicate financial instability.

Combining these elements provides a holistic view of a company's management quality. It involves analyzing quantitative financial data and qualitative factors such as leadership effectiveness, strategic planning, corporate culture, and governance practices. This comprehensive approach allows investors, employees, and other stakeholders to make informed decisions about their engagement with the company.


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