I find good managements by looking for good financial statements over the years.
Personally I have no idea if the CEO, CFO, CTO, Chairman, Managing Director of a company is a hardworking and committed individual who cares for the shareholders and believes in creating wealth for them on a long term.
If the financial statements are positive i.e. there is good organic top-line growth and increase in margins. If the company is giving out regular dividends. If the company is not unnecessarily increasing debt and diluting equity. Then according to me the management is good.
Maybe what I said was obvious, but then I have observed that people talk about good management as if it is an entirely independent area of research. As I see it, investors should care about good balance sheets and profit-loss statements as they reflect the management quality, unless they have had an opportunity to hang out with the company’s management/promoters.
I wrote this post because, of late, I have seen people talk about “good management” as if they have grown up with the company’s CEO!
Good thoughts. I think we need to decouple good management from good set of numbers. Good set of numbers can come irrespective of management quality. Sustainability of those numbers surely depend on the management quality. There are many factors that contribute to the success of a business. Same set of promoters sometimes do very well in certain industries while not so good in other. Example: Wadias own both Britannia and Bombay Dyeing (also Go Air).
Also, a management team that is proven usually implies that the stock would be already trading at a premium. If we are able to find good management teams that have not come in limelight yet, gains could be multi-folds.
I study the management by looking at a few aspects:
- Integrity: Tend to keep this box checked unless any past issues found. Google helps here. Education pedigree too helps, though not universal
- Their vision for business
- Capital Allocation. Do their investments align with the vision.
- Execution: Track record of past promise vs execution.
- How they treat their employees. For many companies, it can be found through glassdoor. But a few phone calls can do the trick
- How they treat their suppliers. High Payables? Again a few phone calls can help ascertain reputation with suppliers
- How they have handled past issues/failures? If someone has no record of handling past issues, it gets difficult to judge. Because issues are parts and parcels of running a business
Yet again… Management is just one of the aspects that one looks through, there are many others
I should have mentioned:
When I say “good financial statements”, I meant “sustainable good financial statements”.
This is what Peter Lynch has said in One Up On Wall Street
However as said by fellow member, Integrity of management is very important. No harm in overviewing the management quality though decision should be taken on basis of results and future growth.
There is already a thread on management quality. Please move the content to the existing thread at : Management Quality: Refining our thinking on "Great Managements"