Good management can turn an ailing company into a great one, and bad management can ruin an otherwise good company.
When you invest, it’s important to evaluate the leadership.
You want a CEO who thinks like an owner of the business.
How do you find that? What should you look for?
No worries. I’ve got you covered.
Here’s my list of five signs of an owner-friendly management.
1. Management Is Honest and Direct
You want management who doesn’t try to sweep anything under the rug. Not even the smallest thing.
If they issue a press release about a problem that hasn’t previously been known to the public, you should see that as a good sign.
You want them to be very honest and admit to any mistakes that have occurred.
Looking back through history, we know that the companies who failed bigtime – with accounting fraud and bankruptcy – had a history of covering things up and reacting aggressively to criticism:
- Like Lehman Brothers’ CEO Dick Fuld who wanted to “squeeze” and “rip out the hearts” of short sellers (those who bet on the stock going down).
- Like German Wirecard who accused two Financial Times journalists of trying to manipulate the stock. The journalists had written about accounting fraud in the company before it was public knowledge that one-third of the balance sheet was fiction.
If the management is prone to lash out and throw lawyers and lawsuits at opponents, you want to stay away.
You should also look at the language they use in general when speaking to the public. Is it straightforward? Or is it full of lingo and jargon?
You want to be able to understand what they say. If you feel like they talk a lot but say nothing, it’s a bad sign.
Don’t invest in something you don’t understand – or in companies with a CEO who you don’t understand.
2. Management Makes Owner-Oriented Decisions
You want a company that isn’t afraid of making choices that are good for the stock in the long run but not in the short run.
This means:
- You don’t want them to run up too much debt. They should be able to pay long-term debt back within three years with free cash flow.
- If they make buybacks (buying back their own stock), they only do this when the stock is cheap. They don’t do it when the stock is expensive.
Buyback programs make the share go up, because the pizza will be shared in fewer slices, so each slice should be more expensive.
This can make the current management look good almost instantly.
But at what cost? How much do they pay for each slice of pizza on the open market?
Is it fair to the owners?
3. Management Owns Shares – and Keeps Them
Owning shares for the long run makes you think like a real owner. We like it if management is faithful to the company they work for.
If they sell large chunks of shares it may be a warning sign that something is wrong.
Enron’s top management was very busy making a fire sale of the shares before it became public knowledge that they had cooked the books. Anyone paying attention to insider trading had a chance to get out before the company crashed and went bankrupt.
4. Management Has an Ambitious Goal
Companies that set big goals do better than companies with lukewarm goals.
What’s a big goal? You know it when you see it because it might almost sound like megalomania.
Let’s look at some examples (these are not stock recommendations at all – other things must be in place too):
- Facebook’s Mark Zuckerberg wanted to connect the whole world, and he did. He made it possible for everyone to find their high school sweetheart. When that was accomplished, he set another goal of building strong communities.
- Tesla’s Elon Musk wants to accelerate the world’s transition to sustainable energy. With SpaceX he wants to reach and colonize Mars.
- Amazon’s Jeff Bezos wants to create the world’s most consumer-oriented business. Imagine how that sounded when he was selling books out of his parents’ garage?
5. Entrepreneurial Managers
There are two kinds of CEOs.
The kind that invites a journalist to his mansion, opens the door wearing shorts and flip-flops, serves a glass of Chardonnay, calls his wife to enter the room and tells the story of how he stole her from his best friend.
Then there’s the other type who is all dressed up in the corporate attire when his secretary leads the journalist to his glass office. He stays behind a big desk and only he can see the family portrait on it.
It’s the difference between the founder CEO who built a business and the bureaucrat CEO who is hired by the owners to take the company in a certain direction – and who can get fired.
If you can find a wonderful business where the founder is still somewhere in a leading position – either as CEO or as Chairman of the Board, you should pay extra attention.
Founders and entrepreneurs are excellent managers. They have vision and guts, and they can take the company to the next level in a way that bureaucrats can’t.
The second-best option is a company with a CEO that the founder picked and trained – like Steve Jobs groomed Tim Cook for running Apple.
Evaluating Management Is Part of Your Investing Checklist
You don’t invest in Apple, Amazon, Tesla, or the likes just because you like the founder CEO.
There are a lot of other things that need to be in place. You have to make sure that:
- You agree with the values
- The company is profitable
- The company is growing
- It’s cheap enough to invest in
- …and a lot of other things.
Evaluating management is just one step on a longer checklist. You have an investing checklist, right? If you don’t, you are welcome to use mine. You can download it right here.
Don’t forget to read my free e-book that explains my whole investing process – including my favorite way to calculate what a company is worth. You can get it here.
