How to Evaluate Management

January 20, 2017 |

In our stock research articles, you may often hear us say something like “if you like the management team,” or “if you trust the management team…” Management matters because they are the people making the decisions that shape everything about a company, from its capital structure to its product line.

But how can an investor judge the quality of a management team? Evaluating management is difficult and quite subjective. This is because so many aspects of the job are intangible. You can indirectly ascertain the quality of management to a degree by looking at the financials—good financials probably point to something that is going right with leadership. Of course, that is under the assumption that management is honest and that they haven’t cooked the books.

So, it takes a little bit of research. To provide some guidance on this process, I wanted to share some of the criteria that I use to assess a company’s management team.

Much of the information I use can be found directly within Stock Rover or via the links we provide in the Insight panel. These include links to the company’s homepage, SEC filings, insider transactions and officers, news, and external financial site links.

Good Management

Look for a management team that is…

  • Stable, smart and experienced
  • Excellent capital allocators
  • Shareholder friendly
  • Honest
  • Growing revenue

How do we do this? Let’s take a look at each of the above bullet points.

Stable, smart and experienced

  • Look for a history of strong leadership with a CEO ideally at least 5 years in top job.
  • Look at educational backgrounds of management team.
  • Look at past work experiences and responsibilities. Having a CEO who is a product person is generally a good thing.
  • Look at the rest of the management team and their qualifications as well as time spent together.

Where to find: All of this information should be available on the company website.

Excellent capital allocators

They have made good business decisions in the past, which can give you some faith in their decisionmaking abilities for the future.

  • Look for improving ROA, ROE, ROIC and better than industry averages on all measures. To learn more about these metrics, see the Know Your Profitability Metrics article.

Where to find: These metrics are all available in Stock Rover and can be compared to peers in the main Table or in the Peers tab of the Insight panel. Find them in an existing view (such as Profitability) or add them to any view.

Shareholder friendly

They are clearly aiming to create value for shareholders.

  • Look for increasing dividends (if the company pays dividends), stable or decreasing share counts, and reasonable compensation (salary + options) for officers. Compare to peer companies for context on compensation.
  • It doesn’t always happen, but the CEO and Chairman of the board ideally should be different people.

Where to find: Both Dividends Per Share and Shares can be found as columns in the Table, and viewed over time by expanding the table row to reveal historical data. Compensation can be found using the “Officers” link in the Summary tab of the Insight panel. The CEO and Chairman can be found on the officers page or company’s website.

Honest

This one is tough to know. But you can try.

  • Search for news and articles that speak to the company’s reputation.
  • Is there always a lot of litigation occurring with the company? Not a good sign.
  • Is executive compensation on par with other companies in the same industry? Examine management compensation via 14A filings.
  • Look at the ownership position, options granting behavior, and insider buying/selling. Excessive options granting and selling would be worrisome.

Where to find: News can be found in Stock Rover Markets, the News tab of the Insight panel, as well as via external links in the Links section of the Summary tab in the Insight panel. Executive compensation can be found in the 14A filings as linked above or via the Officers link in the Summary tab. Use the Insider Transactions link to see the number of shares held by officers and percent sold. If the held amounts are small, or if they are big but a lot was sold, it’s not a great sign.

Growing Revenue

On top of the above qualities, you also want to see that the company is growing revenue in at least one of two ways:

  1. Expanding market share in a stable or growing industry
  2. Maintaining market share in a growing industry.

Where to find: You can find this information by looking at the Growth section of the Summary tab in the Insight panel in Stock Rover, as well as in the Growth view in the main Table. You can also check out investor presentations on the company’s website—they will usually brag about growing revenue if they are doing it. You might also be able to get perspective on the company’s market share prospects by looking at analyst reports (which you may be able to get from your brokerage) or well-researched articles on Seeking Alpha.

Additional Sources

You can fill out your understanding of how management runs its operations and sets priorities by doing the following activities (some of which you might already have done in tracking down the information listed above):

  • Read earnings transcripts to get a feel for how management communicates and their grasp on the business. Transcripts are available in Seeking Alpha and linkable from the external links section of Stock Rover’s Insight panel.
  • Read the letter to the shareholders in the latest annual report. The ways news is communicated and the tone often speaks volumes. More straightforward and honest discussion is generally much better than overly self congratulatory message and meaningless marketing sentences.
  • Examine investor presentations—again looking at tone as well as content. These are usually on company website in the investor relations section.
  • Reading filings (10K, 10Q, 14A, other filings), linked to from Stock Rover’s SEC Filings section.
  • Read analyst opinions on the company.
  • Determine the company’s strategy to grow and thrive—do you agree with it? For example if a restaurant chain is going to open a whole new chain with a different theme, is it likely to succeed? Does the new initiative make sense? Or is it more likely to be a time, energy, and money drain?

Summary

There is no clear-cut formula for determining if a management team is good and trustworthy. This is especially so because much of the information that tells you about management is qualitative and subjective. However, in this article I’ve shared with you some of the things that I believe to be very telling indicators. While it may seem like a lot to look at, the process of evaluating management will give you great insight into many key business factors, like a company’s financials, growth strategy, and the competitive landscape—all of which are important to know if you are considering buying shares.





Leave a Reply

Your email address will not be published. Required fields are marked *