The Importance Of Management When Investing.

 “Is management acting in my best interest”?

The chances of this depend on a lot of things, but this essentially boils down to investigating the achievements of the team behind the Company, and assessing their capabilities to win market share, reach their long-term strategic objectives and lastly increase your wealth. 

Due to previous financial scandals in the past, regulatory frameworks such as the Sarbanes & Oxley act came in to force in 2002 to bring about greater transparency in financial reporting. These frameworks help to ensure that management are adhering to reporting regulations, inevitably promoting shareholder interest. 

On the other hand, despite the introduction of legal and financial reporting framework, there are many other way in which we can reduce the disconnect we have with management when investing our money. 

Shareholding 

In order to reduce the agency effect, it is a common practice to grant directors and management of the Company a shareholding. By doing this, the management of the company automatically becomes the shareholders. This common practice is usually adopted to ensure that the goals of the management are in line with the goals of the shareholders, that is, the maximisation of profits and inevitably their own wealth. 

When assessing large and small-cap companies registered on the stock exchange, it is likely that top executives get the bulk of their income from the increase in value of the share price, hence greater overall goal congruence. With that being said, it’s always important to get an understanding of how many shares management have. The more they have, the more intimately involved they’re likely to be.

Addressing Shareholder Quires

Once every quarter companies registered on the stock exchange are required to host earning calls where they cover the performance of the company. In addition to this, however, shareholders and journalists are given the chance to ask top management difficult questions. From these questions, a relieving side of management may become more evident, for example, if management struggles to answer any of the questions, then this could be a signal of doubt over the integrity of management. 

Previous History

What previous positions have the management team been exposed to? 
A quick scroll through the investor relations page could leave you pleasantly surprised with the level of skills and experience top executives have in these large listed companies. Once you start to understand the previous positions and experience of the executive board, you can start to envisage what greater role these executives play in the grand scheme of things. 

Here’s an example. In May of 2020, we were closely following the rise of digital payments and further speculating where physical cash would be in a post-pandemic world. From our studies we found that the rate of contactless payments surged, sling-shooting the adoption rates of contactless payments and P2P technology 3 years in advance. 

For that reason alone, we were pretty keen to carry out further research into one of America’s fastest-growing fin-tech companies — Square. 

Square specialises in products that help transact and democratise finance, such as the Cashapp and their POS systems.
Upon digging deeper into the management team, what we found were highly qualified product designers that have previously been deeply involved with designing Apple’s iPad. 

For many, when it comes to usability, there are very few interfaces that beat apple products, and this previous experience most certainly had a huge impact on the way squares products were physically designed and functioned.

Check The Stock Prices — With A Grain of Salt.

Short-term price hikes may indicate short-term success, but that does not necessarily mean that the management team behind the quick success is a good one. Where you need to keep your focus is on the long-term. 

When assessing management, obtain an understanding of how long top directors have been appointed to their position. If they’ve been there for a relatively long time then research into previous hardships faced by the company both internally and externally. 

When a company’s management team is faced with difficult times, true qualities and flexibility may be displayed potentially leading to swift restructuring to tackle adversity. Generally speaking, if the Company comes out of difficult times stronger, then such strengths trickle into the valuation of the company consequently leading to higher share prices. 

If on the other hand management fails to tackle adversity, the company faces the risk of irrelevance. 

Insider Buying & Selling 

Insider buying basically refers to when people within the company are buying shares, or likewise selling. When this happens it can give an indication of what management thinks of the companies shares at a certain valuation. If insiders start purchasing a bulk of shares in the company, then this may signal something positive — perhaps they know something we don’t. 

On the other hand, what we want to look out for is how long are the insiders holding the shares for? If they’re swing trading then this may actually provide little value or insight to external investors, but if on the other hand, they hold their shares for the longer term, then something good may be brewing. 

The same applies to share buybacks — this essentially means that the organisation buys back the shares that may have been floated on an exchange. This means that fewer shares are now up for grabs, more often than not having positive impacts on the share values of a Company. 

Co-Founder Led

If a Companies management team involves co-founders, then this may also be an added plus. Think of it this way, you started a company based on a long-term vision, passed through all the ups and downs faced by a start-up, perceived and now you’ve made it to the New York Stock Exchange. As a Co-founder starting from the bottom you’re likely deeply intertwined in the company, its vision, its values, and its goals making everything a little more authentically raw. 

Because the management team has been there from the start, their passion and drive may be greater than an externally appointed CEO. This ambition, drive, and intimate relationship the co-founders have with the company could really excel the company forwards possibly adding to some serious shareholder value in the long-term. 

Length of Stay

One good indicator is — how long the CEO and top management have 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 management that sticks with their companies for the long term.

If retention is low and turnover is high, this may signal a dysfunctional managerial culture.

Fun Fact 

— If the Organisations Management decide to purchase a private jet for business and private uses, then the chances are that the organisation will underperform the market. This possibly highlights management’s true intentions of living up to a lavish lifestyle as opposed to acting in the best interest of the shareholders whilst simultaneously increasing market share. 

Summary

• Management could make or break your investment in the long-term.
• There are ways in how to reduce the disconnect with management (agency) 
• Co-founders tend to be more intimately involved with the company they created 
• Insider buying and selling could give us insight to the good and the bad (possibly) 
• Private Jets are Bad.