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 investment stewardship matters for long-term investors

Are Australian bank boards fit for purpose?

How much industry knowledge does a board member need?

banner

Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

How to help people with retirement spending decisions

Super funds will soon be required to offer retirement income strategies for members in decumulation. With uncertain returns, uncertain timelines, and different goals, it's possibly “the hardest, nastiest problem in finance".

Tips when taking large withdrawals from super

You want to take a lump sum from your super, but what's the best way? Should it come from you or your spouse, or the pension or accumulation account. There is a welcome flexibility to select the best outcome.

Latest Updates

Interviews

John Woods on diversification using asset allocation

All fund managers now claim to take ESG factors into account, but a multi-asset ethical fund will look quite different from a mainstream fund. Faced with low fixed income returns, alternatives have a bigger role.

SMSF strategies

Don't believe the SMSF statistics on investment allocation

The ATO's data on SMSF asset allocation is as much as 27 months out-of-date and categories such as cash and global investments are reported incorrectly. We should question the motives of some who quote the numbers.

Investment strategies

Highlights of reader tips for young investors

In this second part on the reader responses with advice to younger people, we have selected a dozen highlights, but there are so many quality contributions that a full list of comments is also attached.

Investment strategies

Four climate themes offer investors the next big thing

Climate-related companies will experience exponential growth driven by consumer demand and government action. Investors who identify the right companies will benefit from four themes which will last decades.

Investment strategies

Inflation remains transitory due to strong long-term trends

There is momentum to stop calling inflation 'transitory' but this overlooks deep-seated trends. A longer-term view will see companies like ARB, Reece, Macquarie Telecom and CSL more valuable in a decade.

Infrastructure

Infrastructure and the road to recovery

Infrastructure assets experienced varying fortunes during the pandemic, from less travel at airports to strong activity in communications. On the road to recovery, what role does infrastructure play in a portfolio?

Economy

The three prices that everyone should worry about

Among the myriad of numbers that bombard us every day, three prices matter greatly to the world economy. Recent changes in these prices help to understand the potential for a global recovery and interest rates.

Shares

Why green hydrogen is central to achieving net zero

Hundreds of green hydrogen projects show this energy opportunity is finally being taken seriously. While a cost disadvantage and technical challenges need to be overcome, it promises to deliver a path to net zero.

Sponsors

Alliances

© 2021 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.