This is the second part of the assessment of management’s background and credentials.
We previously discussed the important characteristics that determine if a company’s management team had the right skills and attributes to run the business well.
Parts one through six detailed a series of questions from Michael Shearnes’ book “The Investment Checklist” that you can use to assess a potential investment.
To access the previous six parts of this series, please refer to the links below.
Part 1 – please click HERE.
Part 2 – please click HERE.
Part 3 – please click HERE.
Part 4 – please click HERE.
Part 5 – please click HERE.
Part 6 – please click HERE.
Without further ado, let’s push on with the next three questions surrounding the managers of the business.
36. How did the manager rise to lead the business?
Investors should do their best to construct a chronology of the careers of the top five managers and to obtain their biographies if possible.
This data provides information on how the manager rose through the ranks to where he/she is today.
It also gives you a hint as to whether he/she is good at deal-making, operating matters, marketing or other aspects.
Shearnes tells us to be wary of managers with a non-operating background as they may not understand or appreciate the operational aspects of the business.
The idea is to look out for managers who have experience handling the clients of the business, as well as those who have hands-on experience in running and understanding various functions within the organization.
These skills will add to his/her track record of being a good manager.
Finally, try to study the reasons why the manager was promoted over the years.
Was it due to an innovative product discovery, excellent relationships with clients, or some other reason?
Understanding this important fact will enable the investor to better appreciate the skill sets and talent of this manager.
37. How are senior managers compensated, and how did they gain their ownership interest?
By studying proxy statements and disclosures on executive compensation, you can discern the character and motivation of managers.
Note that some incentives reward short-term behaviour while others encourage long-term thinking, so it’s important to differentiate between the two.
Compensation plans of companies that reward long-term performance should be highlighted, as these are the businesses that are more likely to build long-term shareholder value.
CEOs who have low salaries and high stock ownership usually head companies with the best long-term stock performance.
Look for companies that offer restricted share awards as this form of compensation rewards long-term value creation.
It’s also one of the methods by which some managers gained and increased their interest over the years.
The best managers are those who continually increase or retain their ownership in the business, aligning themselves with minority shareholders.
38. Have the managers been buying or selling the stock?
By keeping track of purchases or sales of stock by management, you will be able to monitor management’s commitment to the company.
Such indicators, though, have become less useful of late.
Purchases made by managers should make you sit up only if they represent a significant portion of the manager’s net worth.
For selling, look out for insiders who are selling even though the stock price is continuously dropping – it could signal a material deterioration in the business where insiders are bailing out.
Some managers may also be forced to sell due to margin calls if they had taken up personal loans for which they had pledged their shares as collateral.
Both instances throw up big red flags and investors should cast a critical eye on such companies.
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Disclaimer: Royston Yang does not own any of the companies mentioned.
