Rating management is one of the most underrated parts of investing. It's actually a key part of a business' success. If you have a bad captain at the helm of your ship (share) it's more likely to crash.
Perhaps they don't care about the financial side of the business, maybe they're just interested in lining their own pockets instead of sustainably growing shareholder value. Perhaps they want to 'empire build' and take unnecessary risks.
It's very hard for most investors to get a reading on management, it's not like every investor would be afforded a one-on-one chat with the CEO.
So, one of the only ways to judge is by what management say and do. For example, Elon Musk may be a visionary of today, accelerating the change to electric vehicles, but shareholders should be a bit worried. He's doing great things for the planet, but when an analyst asked about its latest US$1 billion cash burn and large loss, Mr Musk said "Excuse me. Next. Next. Boring, bonehead questions are not cool. Next?"
A company's finances are ultimately what drive valuations higher. If earnings nor the balance sheet are getting stronger then neither will the share price.
One of the key things investors should look for is if management and shareholder interests are aligned. For example, TPG Telecom Ltd (ASX: TPM) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) management are very aligned with shareholders because they themselves are large shareholders.
The same can be said of some investment firms. Chris Mackay is the main person operating globally-focused listed investment company MFF Capital Investments Ltd (ASX: MFF), he and his family own almost 61.5 million shares of MFF Capital, which at $2.33 per share means over $120 million of his family's wealth is invested.
Foolish takeaway
Sometimes management can make accidental mistakes, but it's better having someone you trust in charge who wants and is rewarded with the same outcome as you – growing shareholder returns.
