Understand the
Management
The future growth of a company is highly dependent on its management.
They are
- Board of directors,
- CEO,
- Chairman,
- Executive or non-executive and
- Independent directors
- as well as the senior management team at the divisional level.
Management trustworthiness is very important. We have never succeeded in
making a good deal with a bad person. There are some checkpoints that you can check to understand the quality of the management. They are
- One way to ascertain the management’s
commitment is to gauge the percentage of ownership that individual managers
have in a company. The percentage of shareholder patterns is found in the
annual report of the company. Avoid boards with low ownership stakes because
they are much more interested in taking their profits from the company than
adding value to it.
- Access the management team through the compensation packages they receive.
From an investor’s point of view, it is obvious that a highly compensated CEO only
thinks for himself and not what is best for the shareholders.
- The general rule is to compare net profits to their salary where the formula is salary (board of directors and key executives) divided by net profit.
- Management must have excellent communication with shareholders and
clean annual reports that are easy to understand.
- When it comes to reporting mistakes should be reported as transparently as possible. Management should
admit to their mistake. To gauge the reporting system in the company investors must
read this letter which is written by the chairman.
- Buying back shares using the company’s excess cash is a good sign that the management has its interest aligned with its shareholders.
- Stock
options are the additional shares issued to top performers as a form of
non-cash compensation.
- From the annual report read the CEO's letter to shareholders to get some clues about the quality of the management?
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on Investment or recommend buying and selling any stock
