Most investors realize that it’s important for a company to have a good management team. The problem is that evaluating management is difficult. So many aspects of the job are intangible. It’s clear that investors can’t always be sure of a company by only poring over financial statements. Fallouts such as Enron, Worldcom, and Imclone have demonstrated the importance of emphasizing the qualitative aspects of a company.
- There is no magic formula for evaluating management, but there are factors to which you should pay attention. In this article, we’ll discuss some of these signs.
- When evaluating an equity investment, understanding the quality and skill of a company’s management is key to estimating future success and profitability.
- Looking at the stock price alone, however, can give false signals. In fact, several high-flyers such as Enron and Worldcom have soaring stock prices despite corrupt and inept management operating behind the scenes.
- Look to indirect metrics such as how long the managers have worked there and what type of compensation they get as well as factors like stock buybacks to see how well management is doing.
Strong management is the backbone of any successful company. Employees are also very important, but it is management that ultimately makes strategic decisions. You can think of management as the captain of a ship. While not physically driving the boat, he or she directs others to look after all the factors that ensure a safe trip.
Theoretically, the management of a publicly-traded company is in charge of creating value for shareholders. Thus, management should have the business smarts to run a company in the interest of the owners. Of course, it is unrealistic to believe that management only thinks about the shareholders. Managers are people, too, and are, like anybody else, looking for personal gain. Problems arise when the interests of the managers are different from the interests of the shareholders. The theory behind the tendency for this to occur is called agency theory. It says that conflict will occur unless the compensation of management is tied together somehow with the interests of shareholders.
For more information, visit these websites:
https://www.investopedia.com/articles/02/062602.asp
https://www.fool.com/investing/2019/08/28/esg-investing-how-to-evaluate-a-ceo-using-the-4-cs.aspx
