How You Can Evaluate Management

Evaluating the management of a company is never an easy thing to do. So, how can you really tell if management is doing a good job?

For instance, a company that has done well for a number of years might just be the lucky beneficiary of having a rising tide in its industry lifting all boats.

Share Prices Do Not Matter

Before we look at some indications for testing the quality of management, let us first look at what does not indicate quality – a company’s share price performance, especially over the short run. There are too many factors that can affect share prices in the short run, and where prices are at any given moment in time does not necessarily reflect the quality of management.

Tenure Term

If you are good at your job and enjoy doing it, you should generally be staying on for a longer time, right? I believe this applies to management who are doing a good job as well. Besides, the length of time they’ve spent with a company can also be a gauge of their commitment and loyalty to the cause. Long-tenured and committed management might be able to guide the company to much greater heights.

Interest Alignment

An ownership mentality among management is quite important for shareholders as it can help align the interests of both parties.

Within The Straits Times Index (STI: ^STI), we can find that both the Executive Chairman and Chief Operating Officer of Genting Singapore (SGX: G13) has more than 3 million shares each in the company. At Genting Singapore’s current price of around S$1.50 per share, that’s a stake of more than S$4.5m each – no chump change! Furthermore, Tan Sri Lim Kok Thay, Executive Chairman of Genting Singapore, has a 52% indirect interest in the company through Genting Berhad.

With management that has a significant portion of their wealth in a company, shareholders might be more confident in their commitment.

Foolish Bottom Line

Bear in mind though that, human behavior is dynamic. As times passes, the objective of a person might change as well. Hence, the evaluation of a company’s management team should be a recurring exercise.

In two similar businesses, the one with a better management will, more often than not, produce greater value for investors. So, if you are able to find a combination of a great business and a great management, you might just have stumbled upon one of the rare gems in the investment world.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.