To summarize the previous three articles on company fundamentals, the most important things to look for when analyzing a company is that it should:
- have low and manageable debt,
- be cash generative with good balance sheet liquidity, and
- be very profitable with wide margins and high returns on capital
Despite the above points, the reality of business is that it is humans that make things happen. While processes can be automated, functions outsourced and many other staffing requirements minimized…someone has to be sitting at the top making (at least some) judgement calls.
This is “management” and—even in the face of the above three fundamentals being perfect—bad management can easily destroy shareholder value.
So how do you judge good management…?
While I would suggest meeting with them, this is almost never practical for a private investor. Thus, I would look at all of the following “other” indicators for guidance on making this subjective decision:
- Quality of shareholder/corporate/SENS communication: Bad management will either be too vague, error-ridden or not even bother to communicate to its shareholders. It is typical of bad management to try to avoid shareholder communication, while good management (even if the business is going badly) will stand up and face questioning. It’s all matter of transparency and good corporate governance by those guardians of the public’s capital.
- Management credentials: Often companies’ websites list their Board of Directors and their credentials. Read through this taking particular note of those that have solid experience in other related and successful companies. The critical question here is…would I hire this person for this job?
- Previous Decisions: Look back at the company’s history and major decisions that management had to make. Did they make the right decisions? The chances are that if they made good judgment calls in the past that they will make good ones in the future.
- Presentations: The JSE and AltX are especially active in company presentations. If at all possible, try to attend these and judge the quality of the speaker/s and those directors present. The critical question here is two-fold: firstly, do they sound like they know what they’re talking about and, secondly, do you like them? If you don’t even like them, then imagine what their employees think about them?
- Google: Especially for the CEO, CFO and Chairman, why not just google their names? See what you can dig up on them and see if you like it or not.
While the above methods are not perfect, they should help to serve to form an opinion on whether or not a company’s management are good.
As the captains of large amount of capital, management remain the most critical aspect in a business’s success as they guide it day-by-day and steer it year-by-year.