3 Ways You Can Spot Management Teams That Are Best Avoided

Let’s be honest, not all management teams are saints. The stock market can be a dangerous place and as investors, we need to learn how to protect ourselves from management teams who are clearly not interested in creating value for shareholders.

Here are three yellow-flags investors may want to note when it comes to detecting such management teams.

Pay matters

One simple yellow flag appears when a management team’s total compensation package makes up a large percentage of the company’s profit. In such a situation, investors have to ask themselves if the management team is bringing home an unduly large amount of dough which would otherwise have belonged to shareholders.

In addition, investors should also check out how the management team’s incentivized – are their bonuses paid out according to performance metrics which point to the creation of long-term shareholder value?

That can be an important clue as to whether a company’s management team is more interested in taking care of their own pockets rather than having a good balance between remunerating themselves and creating sustainable long-term value for the company’s investors.

Transactions matter

Related party transactions generally occur when a company has business dealings with a firm that’s owned by members of the company’s own management team. If these related party transactions involve huge sums of money, then it may be a yellow flag, although it must be noted that the reasons behind the deals may not always be nefarious in nature.

But in any case, whenever there are large related party transactions happening, investors might want to get some answers on the nature of the transaction, how prices in the transaction are determined, and why the deal was even necessary in the first place.

High dividend yields matter

This last yellow flag might be counterintuitive, but it’s a practice that has been spotted with dishonest management teams. In these cases, the management team of a company might be willing to pay out a huge chunk of the firm’s profits as dividends to create a high yielding stock mainly to entice investors into the company.

But, the firm’s business is often not able to support such high dividend payouts. What happens next is that management then has to raise capital by issuing new shares or taking on more borrowings every now and then. Both aren’t sustainable over the long-term and would then eventually lead to an implosion of the firm.

Foolish Summary

The stock market can be a dangerous place for the unalert investor. There can be management teams who are not in the game to build a sustainable business and create value for their firm’s shareholders. Although there are many ways that these management teams can prey on investors, what I’ve shared are still three useful yellow flags for investors to note and protect themselves from potential ticking time bombs.

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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 writer Stanley Lim does not own any companies mentioned above.