13 Sep Importance of a Good Management
A strong management is the backbone of any successful company. This is not to say that employees are not also important, but it is management that ultimately makes the strategic decisions. You can think of management as the captain of a ship. While not physically driving the boat, he or she directs others to look after all the factors that ensure a safe trip.
Theoretically, the management of a publicly traded company oversees creating value for shareholders. Of course, it is unrealistic to believe that management only thinks about the shareholders. Managers are people too and are, like anybody else, looking for personal gain. Problems arise when the interests of the managers are different from the interests of the shareholders.
One good indicator is how long the CEO and top management has been serving the company. A great example is General Electric whose former CEO, Jack Welch, was with the company for around 20 years before he retired. Many herald him as being one of the best managers of all time.
Warren Buffett has also talked about Berkshire Hathaway’s superb record of management retention. One of Buffett’s investment criteria is to look for solid stable managements that stick with their companies for the long term.
If insiders are buying shares in their own companies, it’s usually because they know something that normal investors do not. Insiders buying stock regularly show investors that managers are willing to put their money where their mouths are. The key here is to pay attention to how long the management holds shares.
The same can be said for share buybacks. If you ask management of a company about buybacks, it will likely tell you that a buyback is the logical use of a company’s resources. After all, the goal of a firm’s management is to maximize return for shareholders. A buyback increases shareholder value if the company is truly undervalued.
High-level executives pull in six or seven figures per year, and rightly so. Good management pays for itself time and time again by increasing shareholder value. But knowing what level of compensation is too high is a difficult thing to determine.
One thing to consider is that managements in different industries take in different amounts. For example, CEOs in the banking industry take in more than $20 million per year, whereas a CEO of a retail or food service company may only make $1 million. Generally, you want to make sure that CEOs in the same industries have similar compensation.
There is no single template for evaluating a company’s management. Looking at the financial results each quarter is important, but it doesn’t tell the whole story. Spend a little time investigating the people who fill those financial statements with numbers.