Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 137

5 factors to look for when assessing management

While financial statements provide detailed insights into a company’s prospects, future performance is significantly impacted by the business’s management – regardless of size, structure or industry. The quality of the Chief Executive and senior managers is critical to assessing the overall value of an enterprise and is one of the most important factors informing our investment decisions.

Our investment approach is based on a detailed rating system for measuring a company’s intrinsic value and determining if it is a viable investment proposition. We rate both quantitative aspects of the company, such as forecast Earnings per Share (EPS) growth, and qualitative attributes, such as management. So how do you measure the value of a company’s management team?

1. Verbal and non-verbal communication

We seek out information about a company’s management from a range of sources including ASX announcements, company reports, media articles, analyst research and industry sources. But we gather some of our most valuable data from face-to-face meetings and briefings. As an investment manager, we invest in more than 90 companies at any one time and over the course of a year, our investment team has more than 1,000 meetings with the individuals who run these businesses.

Meetings provide us with the opportunity to gain an immediate and potent impression of the people who run a company. Observing their body language and overall demeanour can be incredibly insightful. For example, a lack of eye contact or crossed arms may signal that what they are telling us is inconsistent with reality. We may meet with the same managers many times over several years. This allows us to develop a rapport and understand nuances in their body language, tone and demeanour and, when we detect changes, this can be an important indicator.

2. Track record of success

As the saying goes, “past success is the best predictor of future success” and this holds true when evaluating a company’s CEO and management. In fact, when a board appoints a new CEO (and management team) with a track record of strong performance, this can be a catalyst for us to invest. In our experience, when a company is underperforming, management is by far the most important factor in achieving a turnaround in its fortunes.

When Simon Baker was Managing Director and CEO of REA Group Ltd (ASX: REA), owner of online real estate advertising portal realestate.com.au, he achieved great success with the company. During his tenure, REA’s share price rose from an IPO price of 50 cents to around $3.80 a share. In 2009, Simon joined Malaysia-based iProperty Group Limited (ASX: IPP), servicing the burgeoning Southeast Asian property market. We had great faith in his ability and factored this into our decision to invest in the company. While iProperty shares listed in September 2007 at 25 cents each, in recent weeks the company received a bid by REA offering shareholders $4.00 a share.

Similarly, in 2013, the team leading Flexigroup Limited (ASX: FXL) departed after growing the company and driving the share price from 31c a share to above $4.85 per share. They joined Eclipx Group Limited (ASX: ECX) and have had similar success, with the company’s share price increasing from a listing price of $2.30 a share in April 2015 to around $3.40 today.

3. Alignment of remuneration and incentives

It is absolutely paramount that management’s interests are aligned with those of its shareholders. This is achieved through incentive structures that motivate managers to make prudent decisions that benefit the company and not themselves. The appropriate base salary, bonus structure and performance hurdles are required to ensure the business’s leaders successfully manage the company to achieve sustainable growth. Ideally, performance targets should be a mixture of EPS, which focuses on driving profit, and Total Shareholder Return (TSR), which is related to share price performance. In our experience, over 17 years of investing, the wrong incentive structure can have dire outcomes for the company’s investors.

It is also important to ensure good quality managers are incentivised to remain in the business. If management has some serious ‘skin in the game’ through equity in the company, it further aligns their interests with those of its shareholders. Good examples of this are Jamie Pherous, Managing Director at Corporate Travel Management Limited (ASX: CTD), and Adrian Di Marco, Executive Chairman at TechnologyOne Limited (ASX: TNE).

4. Leadership style

We assess management by evaluating the leadership style of the CEO and individual managers, looking at their ability to layer management, reduce costs and importantly how they cultivate a positive culture and empower their team.

Numerous research studies have shown there is a correlation between corporate culture and a company’s financial performance. For example, in 2001, Eric Flamholtz from the University of California at Los Angeles found organisational culture had an impact on both a company’s effectiveness and the ‘bottom line’. In addition, Hewitt Associates and Barrett Values Centre conducted a study of 163 companies as part of the 2008 Best Employer study and found that “… employee engagement significantly influences organisational and financial performance.”

We can assess the culture based on small but insightful details. For example, observing during a site tour whether the manager knows their employees by name and how they interact.

5. Consistency of ‘story’ over time

We have meetings with the management team of the companies we invest in at least once every six months and we ask some of the same questions every time. If the company’s script changes it raises a concern that they are not on the same path and have altered their strategic point of view.

A disciplined approach to executing the company’s strategy over time and consistency of approach are important factors to measuring management’s ability and gauging if they’re trustworthy.

 

Chris Stott is Chief Investment Officer at Wilson Asset Management. Disclaimer: Listed Investment Companies managed by Wilson Asset Management invest in IPP, ECX and FXL. This article is general education and does not address the needs of any individual.

 


 

Leave a Comment:

RELATED ARTICLES

Why gender diversity matters for investors

Why investment stewardship matters for long-term investors

Are Australian bank boards fit for purpose?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.