Evaluating a company's management
Technically, a company is a legal entity that exists independently from its staff - but nevertheless the people that run the company, their skills and personalities, play a huge role in its success or failure.
Many analysts believe the management team is the single most important factor affecting a company’s prospects.
So your next step is to find out who is currently leading the company and assess whether it's in good hands.
Vet the executive team
Fortunately, the internet usually yields plenty of information about the people at the helm of a company. Here are some questions it should be able to answer:
- What is the educational background of each executive?
- Where have they worked previously?
- What relevant experience do they bring to their role?
- Have they had any notable achievements (or failures) previously?
From this, you should build up a picture of the team's key strengths, weaknesses and general capabilities.
Quiz the management
You can also find out more about the company directly from its senior management team. One of the best ways to do this is through conference calls, which are usually held following the release of quarterly or full-year financial results.
Investors and analysts can dial in and typically hear the chief executive officer and/or the chief financial officer talking through the latest figures and explaining the company's performance. This is followed by a question and answer session in which the callers can raise any concerns or probe for more information about how the company is doing.
You can normally find an archive of transcripts or recordings of these calls, along with all the company's recent financial results, in the investor relations area of the company's corporate website.
Gauge management confidence
If anyone should know how a company is really doing, it's the management team - so the level of confidence these individuals demonstrate in the business can be very revealing. Naturally their public statements will tend to be framed in positive terms, but is this reflected in their behaviour behind the scenes? Specifically, are they increasing or reducing their stakes in the company?
Senior executives are typically remunerated (at least in part) with stocks and options. This incentivises them to make decisions that benefit the business, since their own personal wealth depends on its growth and success. However, when management are seen to be selling their stocks or options, this may indicate a lack of confidence in the company or a negative view of its future prospects.
Look at management history
A strong business steered by a group of skilled individuals can still founder if those people fail to work together properly as a team, or if the organisation doesn't provide the right environment for them to flourish.
If a series of senior executives have left in quick succession, for example, this could point to weaknesses in the company's culture or troubled relationships in the management team. Similarly, you might see a senior post being filled several times within a short period.
When a management issue appears to exist, it's often wise for investors to steer clear of the company, no matter how good the underlying business model seems to be.
Review corporate governance
Every company will have a corporate governance policy defining the relationship between management, directors and stakeholders. It’s there as a safeguard to make sure the proper procedures are followed and to help prevent improprieties, so it's worth taking a critical look at it.
It's likely to include information on:
The board of directors
A good board will include directors who are company employees alongside others who are completely external and therefore independent. This structure is generally thought to protect the interests of shareholders, since an external director might, for example, feel less reticent about criticising another member of the management team.
People with an interest in the business - particularly shareholders - should have access to the board and a clear route to raise any queries or grievances and get them addressed.
Companies will typically have measures in place making it difficult for rapid (and perhaps unwarranted) changes in the company's management, directors or ownership to occur. As an investor, this can give you a degree of confidence in the stability of the business.
- Remember that the quality of the management team is a key factor affecting a company's prospects
- Consider the strengths, weaknesses and experience of each executive
- Take the opportunity to question management using facilities such as conference calls
- Check whether executives are increasing or reducing their shares in the business, or whether there have been any abrupt changes in the leadership team
- Review the corporate governance policy
What is fundamental analysis4 min
How does fundamental analysis work7 min
Analysing an individual company4 min
Evaluating a company's management6 min
Understanding balance sheets8 min
Analysing cash flow statements4 min
Understanding the income statement7 min
The pros and cons of fundamental analysis5 min