How to measure Management

20th May '22 by Lochinver

7 comments 595 reads

I have been a subscriber to Stocko for over the year now and it has been one of my best decisions since deciding to move from being a lifelong FD to being a full time investor (not trader !) around the same time

I thought I knew a fair bit about this malarky given my background, but I was wrong. Its a whole new world. Despite the fact that there are a lot of similarities to my previous roles, in terms of gauging whether businesses are investable.

However, one of the big factors that I have found from my previous roles which maybe differs from the very analytical Stocko approach is that I probably give much greater weight as an investor to the 'soft' issue (apologies...) of Quality of Management. This was absolutely fundamental in our previous decisions about whether to invest in or acquire another business.

It would be great to hear other investors advice on how they tackle this matter. For what its worth, these are the factors I look for (no particular order) :

Can they demonstrate that they actually understand, and have a passion, for the business in presentations to investors. A clear grasp on the key levers and drivers, rather than just delivering from a script
Have they got significant successful experience in that specific industry over tens of years not just a few years.
Do they have a track record of parachuting in to the top job then jumping out to another just a few years later
Are they personally heavily financially invested in that businesses' (and therefore their and their families' own) future success ie at least multiple six figures. Money where their mouth is.
Are they candid and open - do they give a straight answer to a straight question, irrespective of if things are going well or badly at that particular time
Do they appear honest and reputable - telling it as it is without a negative body language when put under pressure during questioning
Are they happy and do they love what they do and do they 'believe' - again, positive body language no matter the circumstance
Do they respect and value their staff and people around them . And is that reciprocated by those same people.
Has the previous FD or long standing NED taken on the top job ? Danger signals for me.

Personally I believe this subject to be fundamental to future success .…

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AnonymousUser1782684

20th May '22

Thanks Rutland, some very good points

Metatron

You have left out how much does management pay themselves and how diverse would it be reasonable for the management be? If for example a business products or services sell predominantly to females i would expect to see females on the management/board.The same applies to female heavy employee companies. If a company is based in Africa i would expect an African to be part of the management/board.

RAMO

I agree the soft detail on management ability is vital, how do you quantify it is the difficulty. I could another point: an over large ego and similar.

Lochinver

22nd May '22

Thanks for your responses. I do find it strange that in all the analyses of SCVR and Stock pitches, there is virtually no assessment made of management quality and capability. For me its the start point. If the business cannot demonstrate this, I don't take it any further and waste time on carrying out a detailed financial analysis.

Just my view and of course I could be wrong.

rhomboid1

Absolutely agree…I spend most of my time trying to understand the ‘secret sauce’…the v best investments have it & it is apparent from the way mgt communicate both in RNS’s & AR’s…but more apparent still in face to face discussion at AGM’s or company visits

you can’t screen for it…but ultimately it will appear in the quality metrics of the business

illiswilgig

23rd May '22

Very important factor for me. Something I pay a lot of attention to in my investments. Particularly for small and microcaps where broker coverage and analysis is missing - an accurate assessment of manaement capability is all the more important - both to identify opportunities and avoid calamities. In my case I'd say its work in progress.

When I subscribed to Stockopedia I understood that its a dataased based approach - so am not surprised by the lack of explicit management commentary within the stockranks. Or the write up of rules based selections like NAPS and SIF. I don't think the quant appoach does not view management as important - just that the impact of management - good, bad or indifferent - turns up in the data. I think this approach probably works well for large and mid caps where the data is comprehensive and rapid and a lot of analysts pore over it to make forecasts. For small and micro-caps the impact of management can be much greater, there is a lot less data and it takes a lot longer to arrive - so nderstanding management approach and their capability is very important to me.

It's my impression that the SCVR does pay a lot of attention to management. It's not unusual for it to be critical of management - though that tends to lead to the company not being covered in the future so there is a self-selection process embedded in it, I can see that on the stockopedia site the data and graphs are likely to come to the fore - and they are very useful . The trading updates, AGM statements and results being analysed are not very good for revealing much about management - intentionally so in many cases - so naturally the numbers come to the fore . Though its my impression that the SCVR always highlights what the directors say in their own words - rather than paraphrasing it or leaving it out.

Perhaps the most important point for the SCVR is that - measuring management is difficult anf there is no commonly agreed scale or measure. Criteria are personal and likely to be relatively emotional and subjective. More art than science. In a quick snapshot of the daily statements putting forward a personal view of the management - which is not likely to be widely agreed - could easily get in the way of the data and I can see why it should take a backseat here. The SCVR is offered as a starting point for us to do our own research and I have no problem making my own assessment of management - which involves a lot more research over a period of time - knowing that my criteria and measurement are very probably different from others.

cheers

Mark

HHR

29th May '22

My investment strategy is to find high growth companies that have the potential to be held forever (I know - it sounds a bit like looking for a needle in a haystack and it is!). As such evaluating management is the second most important part of my process.

Here are some of my tips – these aren’t rules but more a cumulative jigsaw type of story :-

Age
Older managers have more experience and track record but have probably achieved their potential and are likely to deliver ‘more of the same’ in future (that could be a good thing or not so good). Younger managers have the potential to be the next Bill Gates but come with more risk
Glass Door
I place a lot of weight on Glass Door (and Indeed) reviews. Although companies have ‘wised up’ and often swamp Glass Door with fake reviews, these fakes are usually easy to spot.
A preponderance of fake reviews isn’t necessarily a red flag for me – providing they are accompanied by some genuine good, bad and indifferent reviews. But if I think the fakes are there to ‘drown out’ whistle blowers, as is often the case, then I am concerned.
If there are no fakes at all (rare but it can happen), then that tells me management are comfortable in their own skin and happy to let their performance speak for itself.
Also, Glass Door can often reveal information relating to a company’s competitive positioning in its industry
Ramping
The absolute stock market jewels don’t have to sell their story – the story basically sells itself (in the stellar financial performance).
In fact managers of these elite companies often ‘anti-ramp’ to stop the share price getting ahead of itself and making them a hostage to fortune.
Excessive ramping can indicate an over emphasis on selling in the management culture. If management is ‘selling’ to its shareholders then this can indicate too much emphasis on image and sales in the overall corporate culture and that brings risks of sub-optimal business behaviour.
Here is a quick list of signs of ramping that I look for and try to avoid :-
- Cherry picking different metrics and percentages in the results. Results should ideally present the same KPI’s in every announcement
- Spurious announcements to the stock market of contract wins and partnerships. With contract wins I always look to see if the client put up a spokesperson – if they didn’t I mark that down double
- Excessive appearances on investor news channels
- Excessive space in the results for strategy and new products
Capital allocation
Companies I analyse often throw up lots of high margin profit so it is important that management can deploy that into equally high margin growth opportunities
Retirement
One of the many perks of being a talented CEO is you get to choose your exit timing. So when management decides to move to a non-exec role or leave altogether then in my experience it is almost always be a bad sign. It’s just human nature to make that key decision when you see tougher times ahead.
This only applies for successful companies and management. When average or bad managers move it doesn’t mean anything to me
What management doesn’t say
Sometimes management fails to update on something which is obviously of interest to investors e.g. competitive pressure, current trading, order position etc. When this happens it is often an indicator that the information in question is disappointing or at risk. Sometimes I have even noticed management insider trading the vacuum of market sensitive information
Equity ‘skin in the game’
I just want to end with something a bit controversial. I used to take big losses on ‘jam tomorrow’ story stocks and it puzzled me that most of these companies had significant management equity. To me, management ‘going down with the sinking ship’ seemed to go against common sense and the teachings of many investment textbooks.
I did a lot of analysis and thinking on this point and now I only positively weight management equity in high growth, PROFITABLE companies.
In loss making companies or mature low to zero growth companies high management equity is now a red flag for me.
My theory on this is that companies and nomads have worked out that investors look for management equity because they see it as a safety margin (erroneously in my view). I think in a lot of these average or semi-fraudulent companies the real plan for the directors isn’t to make money from growing their equity stake, instead it is to milk the salaries, options and bonuses available to listed companies. Management knows that their ticket to accessing these perks is significant equity – they don’t care if they eventually lose most or all of that equity as long as they have made a tidy return along the way

How to measure Management

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Lochinver

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