How to get a true idea of management of a public company

[mikazo]

Hi everyone,

 

It's my first post here, so I'd just like to start off by saying hello and that I look forward to some interesting discussions on this message board.

 

I'm a new student of the school of Buffett thought when it comes to investing (I'm only 23), and I'm considering my first real Buffett-style stock purchase. I've owned individual stocks before, but have not completed as thorough an analysis as I'm beginning to do now.

 

I've done the financial statement and valuation portions of a stock that I'm considering, but what I'm now having trouble with is how to assess the quality of management that is running the company. I've read through some annual reports, read some proxy statements, and some investor pamphlets and documents. However, the latter two documents are filled with charts proclaiming the company's bright past and bright future, and the former two are more about the company than the individuals that run it.

 

I've thought of trying to listen to some audio recordings of past conference calls, but haven't had the time lately.

 

Google has revealed little on this subject, so my questions are: How do you, as an individual investor, assess the quality and character of management of a public company? Do you have a process or checklist? Other than actions taken by the company, is there any other way to judge the character of the CEO and other management?

 

Thanks very much, and good luck in your endeavours.

[Ben Graham]

The Library of Congress Business Reference Services has every thing but the kitchen sink - how to assess the quality of management that is running the company.

 

http://www.loc.gov/rr/business/company/public.html

 

Check the quality of management: How competent is the management running the company? More importantly, how focused are they toward the company, customers, investors, and employees? In this age of rampant corporate greed, it's always a great idea to research the management of the company. The companies annual reports as well as newspaper/magazine articles are good places to get this information.

 

http://www.wikihow.com/Find-Great-Companies-to-Invest-In

 

Super Investor Portfolio Updates

 

http://www.dataroma.com/m/home.php

[Sportgamma]

If management has been there for some time, you could analyze its capital allocation track record. What kind of decisions have they made in regards to investments into operations, share buybacks or issuance, dividends, debt issuance or paybacks, aquisitions etc.

 

See example here (conclusion nr. 3):

http://seekingalpha.com/article/262159-fundamental-analysis-of-nutrisystem-a-look-at-2008-2010-results

[Sportgamma]

You can also read the letters to shareholders, study compensation schemes and ownership.

[Myth465]

The only ways I have found are to follow the past, or follow the present. You can look back analysis past calls and report and see if they did what they said, or you can buy a small position and see if they do what they say.

 

I am pretty lazy so I buy a medium position and get burned or win out. With ATPG simply looking at the past would have told me everything. I recommend doing the leg work or taking a small positions. I have been doing this for 4 years, and know about 10 companies very well..

[SharperDingaan]

Look at 5-yr history, & stay in the top 3 firms within the industry segment. You might miss the odd diamond, but if management was no good these firms would not have made the cut.

 

If it is something local - look at the storefront, & read the social networks, etc. If its industry, talk to the worker bees (the original social network). The storefront observations should intuitively make sense. The social networks will point to who's best/worst & what are the common practices.

 

SD 

[ageofsocrates]

imho, the true measure of a good management team is their capital allocation record (whether retained earnings translate into corresponding equal or greater market value). Another key factor would whether management incentives are aligned with shareholders (i.e management owns a significant chunk of stock).

 

Cheers

[scorpioncapital]

"However, the latter two documents are filled with charts proclaiming the company's bright past and bright future, and the former two are more about the company than the individuals that run it"

 

You've answered your own question :) If your mental model says that an annual report should be written in a certain way and that glitzy charts are a bad sign, then you might decide to pass. I think Buffett once said that you want an annual that speaks to you as opposed to be a marketing piece created by the PR department. Conversely if you see nothing wrong with this, you may consider meeting them in person at a meeting. Watch words, body language, dress, everything, you want signs of things that translate in your mind into integrity, skill, genius, and drive. I tend to look for interesting eccentricities, especially if they suggest a correct, but minority point of view.

[mikazo]

Thank you for the good ideas, everyone who replied. The company I'm considering has a consistent history of buying back shares, I just wasn't sure if that was enough to go on for judging the management. I couldn't find any letters to shareholders, but maybe they're contained in the annual reports. I'll have to read them more in depth to find out.

[Liberty]

The only way I've found to get an idea of management is to consume (read, listen, watch) absolutely everything you can find about them and the company and let it all aggregate and cross-pollinate in your head until you form an impression. More an art than a science, IMO, though if you had to make a checklist, there are certain things that would get more value than others (large insider holding bought with personal money, actions consistent with long-term vision, etc).

[mikazo]

One thing I did find about the company I'm considering: The CEO personally heads the committee for corporate social responsibility, rather than delegating that task to some lower-level manager. Is this a good sign?