Education: Growth & Income Investing

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How Strong is Company Management?

Growth and income investors, commonly referred to as long-term or buy-and-hold investors, seek companies of value and virtue. These are fundamentally-strong companies that consistently post solid earnings, which will cause the price of the stock to increase over time. One area that is of prime importance for this type of investor is strong company management and leadership. They are the ones you are entrusting your hard-owned money with, right? While this cannot exactly be measured by some type of ratio or formula, there are certain areas that one can and should focus on.

Biographical Information

It only makes sense to first find out who exactly makes up the company’s management team. This can be found on most company’s websites, usually under a section entitled investor relations. Or, if you can get your hands on one of the documents companies are required to file with the Securities and Exchange Commission (SEC), you may be able to obtain various management tidbits here as well. Biographical information such as the individual’s title, employment history, accomplishments, education, personal interests, etc., can usually be retrieved. A company’s CEO, Board of Directors and executive VP’s are usually featured.

One area that you should focus your attention on is length of tenure. How long have the CEO and top management been at the helm? If they have been around for a number of years, has success accompanied their stay with the company? Money managers have been known to actually follow successful managers when they bolt to another firm. If they have been running the ship for a short period of time, how did they do at a previous company or in a previous position?

While a company’s web site, SEC filing or various other marketing materials attempt to paint their management teams in as favorable a light as possible, it would also help if you can uncover any dirt as well. Have they been involved in any criminal or fraudulent activities? If so, you will want to steer clear of companies run by these types of individuals.

Strategic Plan

Does the company you are analyzing have a mission statement? A good mission statement will communicate the company’s core values and goals for management, employees and stockholders. For example, one of my favorite mission statements is Nike’s:

"To bring inspiration and innovation to every athlete in the world."

While a mission statement may seem a little “cheesy” it helps provide the company with the direction it needs. It also helps stockholders and analysts monitor whether or not it is living up to its end of the bargain.

Insider Buying

When management purchases shares of its own company’s stock, this is generally a sign that those individuals believe it is a good investment. You will often hear analysts state that managers are putting their money where their mouth is. If they are holding on to their shares for quite some time, this can only be a good sign. They are confident in the company’s future prospects and in their ability to keep the ship moving forward. On the other hand, if they are dumping their shares…

Two SEC filings that you should be aware of are Forms 4 and 144. Form 4 reports changes in beneficial ownership of securities, while on Form 144 stockholders must report the intention to sell more than 500 shares, or $10,000 worth, of a company's stock in any three-month period. For more information click here to visit the SEC’s web site.

Compensation

Company executives are paid quite handsomely. Are they overpaid? That is very difficult to determine. It would be in your best interest to compare compensations of CEOs within the same industry. They should generally be in the same ballpark. If one is noticeably higher, you may want to ask yourself why this is the case. Furthermore, if the company is not performing well, this is a huge red flag. If a fat paycheck is guaranteed every two weeks, what incentive does this manager really have to perform up to his or her greatest potential? Shareholders should always be in their best interests. It is my opinion that compensation should increase in line with corporate stock performance.

Conference Calls

Investors nowadays are able to listen in to a company’s quarterly earnings conference call via the Internet. You can gain some great insight via these calls. Analysts and money managers are also able to pepper management with questions. How does management fare in this type of situation, especially when tough questions are thrown their way? Are they honest or are they experts in dodging important issues? These individuals will also be known to make appearances on various financial networks and programs. You may want to take a peek at these as well.

Conclusion

While we all wait for some financial genius to formulate a mechanism for evaluating management strength, the above parameters can help do the job for the time being. An effective management team is imperative for a long-term hold. One need not look further than Enron and Worldcom. Enough said.