When you invest into a company, one thing you want to be fairly certain about is the quality of management. If the hired guns are only interested in the perks their position provides and don't have enough incentives to run the company to the best of their abilities, then it will not be the company where your investment as a shareholder will earn the greatest return.
Here are a few criteria that shareholders can judge management on as described in the recent Morningstar video report:
- Candidness about their mistakes: Management that tries to downplay or hide problems already in the open is likely to be sweeping more problems under the rug that investors will never hear about.
- Modest office space: As a shareholder, you're more interested in building a more sustainable business than in building lavish office buildings to house executives.
- Pay coincides with performance: If management gets paid handsomely no matter the outcome, what incentive do they have to go out on the limb and try to squeeze every dollar of profits possible?
- Lack of company-funded perks: Morningstar analyst makes a great point in stating that when an executive already makes a multi-million fortune every year, that person should be able to afford his/her own second home, security, or a car with a chauffeur. If executives are extensively taking advantage of luxurious perks provided by the company, they may easily lose focus of what should be the most important part of their job: earning shareholders the greatest return possible on their investment.
- Team work: CEO shouldn't hog credit for all the great things that the company has achieved and should give credit where it's due. Otherwise, other talented members of the executive team might get alienated and leave for a competitor where their achievements will be recognized.
Additional resources:
- Morningstar's video report: Management Warning Signs
- Investopedia: Evaluating A Company's Management
- The Motley Fool: How to Evaluate Management
2 comments:
hi,
i am very happy you shed some light on this issue but, my major concern is this; should i be worried when i see a company i have invested in use the lastest model of Honda CRV as company car for its Executive? when should i panic and when should i not panic when i see something like this? are there any indices to judge a company by, as to if it can afford such luxuries or not? i look forward to your intelligent answer/contribution.
worried Ray...
Ray: I'm not aware of any such indexes, but who knows maybe they do exist. As far as your example, I would worry more if the executives were driving CRVs and Priuses for show off and yet still frequently flying on company planes. Everything needs to be looked at in a context, take newspaper headlines for what they are: flashy headlines that will sell more newspapers.
Either way, usage of certain luxuries should not cause you to "panic," but rather raise your concern about whether executives' incentive package is aligned with the shareholders' goals.
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