What differentiates professional share market investors from rank and file amateurs? One question the 'pros' will almost invariably ask is "Who's the boss?" – in other words, how good is this company's management team?
So now we have the key question, how do we work out the answer?
Assessing the human element
While many of us spend a lot of time analysing corporate performance, there is also a 'flesh and blood' evaluation that can be even more significant in formulating your views of a share's future. Of course, there are the annual general meetings to attend where you will hear from senior management on their plans for the future, but you can do more.
Management personnel deal with a lot of people – employees, clients, industry peers, industry associations and so on. Most of these people are readily accessible, so talk to them and ask their views of the management people you want to assess.
As the picture of their performance and qualities start to materialise, you will begin to see a more balanced rating of management expertise.
If it's good enough for Warren Buffett…
Arguably the world's most celebrated investor, Warren Buffett believes seriously in evaluating the quality of senior management as a key factor when selecting stocks.
Buffett has actually gone so far as to recruit outstanding management talent to be employed by companies in which he holds a major shareholding. His skill in recognising exceptional talent has been a core factor in his remarkably successful career.
Whether it is direct contact with key management figures, building a profile through the people they deal with in business or in-depth analysis of their present and past performances, your quality rating of senior management is one question you should be asking.
Over-confidence can be underwhelming
One trait among some senior managers that you should be wary of is the arrogance that stems from over-confidence. It is a natural human defence mechanism that seeks to defray further investigation by blustering through any debate.
You would have thought that the findings of the recent Royal Commission into the financial services industry would have put paid to this, but it still exists!
There are also other personality problems to look out for (and be quick to run a mile from) among senior management. The use of 'corporate speak' is often used to avoid clarity. Lots of lofty-sounding jargon can be used to disguise very little substance.
Then there's longevity. How long have the key decision makers within the company been in their positions? Too many changes in too short a time frame could be a result of systemic problems within the management team.
The one question every investor should ask
Choosing the right shares to invest in is a function of diligent financial analysis, studying market conditions and – most importantly – assessing and evaluating the quality of senior management's performance.
Some of the world's most successful investors place more importance on the last criterion than any other. So make sure when you ask 'who's the boss', you have a very good idea of the answer.
