How to Spot Companies with Good Management Team

Most investors start off their stock research looking at share price charts or financial numbers like earnings growth or its P/E ratio and tend to ignore or pay little attention to the management team - those people running the business behind the scenes.

Importance of a sound management team

Warren Buffett often points out that stocks investing is actually buying a piece of the business. Hence, he emphasises the importance of evaluating the people running the business:

“Charlie and I look for companies that have … able and trustworthy management”

The reason is simple. The management is responsible for the strategic decisions to create value for shareholders and run company in the interest of the shareholders (especially minority shareholders).

However, the main problem that lies in evaluating the company management is that there is no dedicated formula for doing so and most aspects of the job is intangible in nature.

That being said, below are 3 guidelines that we can use to assess the quality of a management team.

1. Share Ownership

No one will understand a company’s product, management, and prospects better than its own executives and directors. Hence, if the top brass has a sizable interest in the company share ownership, they will be motivated to drive the growth of the firm.

On top of that, the key here is to pay attention to whether the management ‘insiders’ are buying shares of their own companies.

As the legendary Fund manager Peter Lynch once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

When the insiders are active with their purchases, it usually signals the confidence that the firm has on the prospects of the company.

For example, Propnex’s director Kelvin Fong has been snapping up shares ever since April 2020 after COVID-19 hit. His stake was boosted from 8.01% to 8.42% as of 20 Jan 2021 and the share price has also jumped more than 70% during the period.

2. Compensation Package

The management is responsible for increasing shareholders’ wealth over a period of time. But if the managers choose to reward themselves with exorbitant amounts of money, that would go against the ‘moral duty’ they have for the shareholders.

In addition, investors should also look at the management team’s payout package when the company is facing tough times, especially in this COVID-19 period.

While determining the reasonable level of compensation can be a difficult task, here are 2 things that investors can do:

• Peer comparison of the average compensation in the industry

• Compare the compensation package to the firm’s financial performance

Long story short, management teams should adopt the concept of ‘rewarding for performance’. This means that they should only be rewarded handsomely if they increase shareholder value in the long term.

3. Experience and Length of tenure

Last but not least, the experience and length of tenure of the CEO and the top management serve as an important indicator too. This is one of the important investment criteria for Warren Buffett and he often touts 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.

A great example is iFast Corporation whose CEO, Mr Lim Chung Chun, has co-founded the company in 2000 and been spearheading the company’s growth for more than 20 years to date.

Started as a small outfit aggregating the different funds under 1 platform, iFast has grown under his leadership into a well-established Fintech ecosystem across the five markets and also successfully listed in the public markets in Dec 2014.

Conclusion

A company’s financial performance is important because it exhibits the competitive positioning of the company at the present moment.

However, the quality of management matters in order to take the company to greater heights. And although there are no clear guidelines on what a good management team should be like, it is still worthwhile to go through this mental exercise to make sure that you are investing your money with people you can trust.

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