MENU

3 Signs That Can Warn You About Poor Management In A Share

Investing in the stock market is all about being part-owners of businesses. And since the ability of management can play a large role in the success or failure of a company, we should ideally find management teams whom we’d be comfortable to be business-partners with.

Unfortunately, evaluating a company’s management team might be one of the toughest parts about investing.

After all, there is no grading system when it comes to analysing management. Moreover, no individual is perfect and it is thus extremely hard to find a flawless management team.

Fortunately, we would not need flawless management teams in our companies. What we need to do is merely to differentiate between the chronically bad and the ones who make occasional mistakes.

Here are three tell-tale signs that can help you identify management teams to stay away from.

Having the wrong focus

One particular trick to identify management teams to stay clear of would be to note how they react to their company’s share price if it is falling.

If management is more worried about the movement of the company’s share price rather than the progress of the company’s business operations, it can be a red flag.

After all, it’s a company’s business which drives its share price over the long-term and so it follows that it’s the business which management should primarily be concerned with.

In a similar vein, management teams who are more interested in promoting the stock price of their companies rather than the business itself should also deserve deeper scrutiny from investors.

“No bad news here”

Another indicator we can look out for is when the management tends to only talk about the good stuff that has happened while avoiding any discussion of bad things that have occurred.

This characteristic is easily spotted if management fails to acknowledge negative developments about its business in official company press releases or filings despite the media having picked up and reported on such news.

If management tends to cover up bad news, investors might only know about them only when the issues have gotten out of hand – that can be worrying.

Correlation of bonuses and performance

The last tell-tale sign I’m going to share is the level of correlation between a company’s business performance and the level of bonuses its management team receives.

If you observe that management’s bonuses are increasing rapidly even when the company’s operational performance has been poor, this might be an indication that management’s interests are not exactly aligned with that of shareholders.

Foolish Summary

These three tell-tale signs are certainly not fool-proof methods to find bad management. But, if you come across management teams that have any of the aforementioned behaviours, it might be a hint that you should take a deeper look into the quality of the people managing the company before you plonk down your cash.

Stay tuned for more tips from investing masters by signing up for a FREE subscription to The Motley Fool's weekly investing newsletter Take Stock Singapore. 

Like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

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