Management QualitiesAnalyzing Firms
There are traits, management qualities, and attributes which indicate a good management team in advance. In tandem, these are very hard to find. However, these management qualities are always shown by their actions. They are reflected in the financial statements, print, and news media. They will be stated by former workers, especially middle and upper management which dealt closely with them. Finding a team which displays the following management qualities below is imperative to having a good investment return.
A firm’s management team cannot, under any circumstance, be passive. They should aggressively handle problems and be quick to identify them and find solutions. Their solutions do not always need to be aggressive (in the sense of drastic or severe) but they should definitely be quick in reaction. They cannot be passive, and must constantly and actively expand the social connections of the firm. Management must constantly expand their network, increasing the persons they can utilize in market transactions.
A management team should act similar to an analyst’s preferences. When making decisions they should be focused on making financially disciplined choices. Management should increasingly choose fiscally profitable actions for shareholders, and increasingly flee those that bring them no value or destroy them. Look for management that avoids wasteful spending, debt financing, interest payments, or heavy bonuses and corporate perks. They should never be frivolous with company money and always focus on building value.
Successful management must be extremely aware of what happens under their watch. This occurs inside and outside, of the firm which they run. Management which is disconnected from any group associated with the firm: Shareholders, Employees, or Clientele, is bound to run into trouble. Management needs to engage at all levels of their firm to receive information and react appropriately. Buffers between these groups and management mean they won’t be able to properly react to information since they’ve cut themselves off from receiving it. They will also be increasingly unable to identify with these groups. Beware the CEO with private parking and private elevators before their private office: Isolation in business is deadly.
Management should be able to interpret business events from multiple perspectives. You cannot afford executive teams which can only relate to information one way, or which is only experienced in one area. If administrations can only relate to information from a single perspective, they may mishandle business outside of that capability. It doesn’t matter if it’s financial, manufacturing, sales, operations, or a marketing perspective. You should seek balanced management teams which have a broad comprehension of many parts of the business.
Upper management executives should exude confidence in decision making, but not be cocky or arrogant. Management is not a job for timidity. Executives need to have the personal strength to stand morally against market trends that could hurt the firm in the long run but look great short term. They also have to be able to withstand the vicious criticism that may come with certain decisions while acting in the best interest of shareholders or clients. If they do not, they may bend to external political, financial, or social pressures that are not in the best interest of the firm or its investors. Confidence is required to stand fast for the firm’s investors.
Insecure executives often find ways to offer themselves a false sense of security. To compensate for their weaknesses, they may surround themselves by those who reinforce their decisions, who agree with them constantly out of ambition even when their plans are horrible. They may alternatively punish those who dare disagree with them on any level so their plans are constantly endorsed with out of fear. Either way, the result is the same, they are surrounded by men and women who say yes to everything and offer no real strategic value to the firm. This helps kill an investment since no manager can be aware of problems when employees are afraid to speak up for fear of retaliation. In all firms heavy-handed control in situations that lack awareness is bad, and this is especially true in publicly traded corporations which employ thousands of workers.
Confidence helps the firm in other ways as well. Managers that feel timid, worried, or threatened about their position may engage in power wars within the firm. This divides the workers in the firm into competing or rivaling groups jostling for position. Those caught in power wars are often distracted by events within the firm, and may not make wise choices. If things go too far, the fallout from the political office battle may drive competent management or employees out of the firm. During a power struggle, certain management members may attempt to reduce the power given to others and centralize decision making. This forces others to climb their bureaucratic ladder to accomplish anything, resulting in inefficiencies in the firm.
Confident management does not worry if they will be replaced but focuses on the wisdom of their decisions. Employees do not have to worry about the managing team’s insecurity or deal with its fallout. Confidence and competence allow everyone to focus on their job.
Management teams need to be completely devoted to their business practices. Executive teams should be on call in order to be able to handle the myriad of problems that may occur within their firms. They should work greater hours than the rest of their company, due to adverse consequences that may occur. An executive team that doesn’t work greater than full time will overlook errors. Management needs to be obsessed with their firm’s future.
Management needs to be fair with employees with the firm, and avoid biases that destroy firms or skew rewards. By preferring family, friends, or romantic interests over employees because of their connections to executives, management discourages firm members from contributions. By skewing rewards towards their connections they send workers the message that executive buddy systems are more important than effort. Executives should avoid nepotism or favoring friendships, and spread profits fairly amongst the firm. If they don’t treat workers right, they kill employee motivation. They will also drive away their deserving workers.
The long-term success of the company should be the focus of the executive team. Only when management teams operate with long-term success as their purpose will an investment be worthy of owning. When executive teams lack long-term focus a firm’s path is likely to go awry. Ensure that administration is focused on the business, fixes problems, corrects mistakes, follows through with previously announced plans, and doesn’t vacation more than work. If management lacks focus, bypass the investment. Executives who annually pretend to “solve” the same problem, play motivational speaker, skip work for vacation, or care more about personal fame than firm success should be avoided. They won’t make investments successful.
Pride in business is dangerous. Good management teams consist of people who are humble. Personalities with a streak of humility will never see themselves as perfect, above correction, or infallible. This results in executive teams that do not assume their course of action is automatically correct. When shown flaws or errors, they will be open to change. The opposite of this quality is arrogance. Conceited managers believe they are foolproof. They often allow their ego to override logic or correction. This may extend beyond the firm, believing they are superior to clients, customers, analysts, or advisors. Arrogant management teams will fail after assuming they are beyond simple mistakes, competitors, or legal repercussion. They always ignore something crucial. These downfalls have often destroyed investor returns for extended periods, bankrupted entire firms, or incited economic calamity. You should run from investments controlled by egotistical managers.
You must seek management teams that have a deeply ingrained sense of integrity. These executive teams have a strong moral compass, especially in business. What they will do and what they won’t do are direly important. The key indicator of this is how they treat others who work for them. This counts both inside and outside of the firm.
Is the executive team abusive of others, inside or outside the firm for any reason? Do they regularly slander or libel those who point out flaws and praise those who agree with them? Be wary a management team which pressures or intimidates firm members into sycophantic behavior. This is especially true if they practice these actions on those outside of the firm. Management which attacks external advisors, analysts, or journalists accomplish nothing except giving the firm a bad reputation.
Do they seek revenge when publicly contradicted? Vengeful team members often cross, betray, or harm firm members who provide positive input into the firm. They may scare them into quitting or leaving the organization.
Do they have a reputation of being crass, vulgar, or cruel to workers? Have they been convicted or repeatedly accused of sexual harassment, racism, or discrimination? Inappropriate office actions and sexual harassments also drive team members from the business. This drives potentially skilled and hardworking firm members elsewhere, reducing the long-term potential of the company.
Leaders need to be innovative, creating and executing strategies which can expand the reach of their products and services. They also need to be both adaptive and clever, willing to use resources in new ways and willing to quickly adapt a plan which doesn’t work. Failure must be accepted as a possibility before a course is attempted, as all change involves risk. Additionally, even a failed invention has parts or sections which can spawn other creations. A management team cannot afford to be fearful of the future, or of inventiveness: change will occur either way, the biggest risk is being completely unprepared. Firms must constantly create and adapt. This is not necessarily limited to products, even if product lines remain the same businesses will still need to adapt to new strategies and techniques. This ensures the firm can continue to operate in the face of encroaching competitors.
It is important that firms do not excessively give to their friends and family. Management, in addition to being fair, must also be impartial in their business. Giving deals or payments to friends and family members undeservingly is an abuse of power. More importantly, this is not in the long-term best interests of your investment. You should check “Related Party Transaction” sections to ensure that large sums of money aren’t being given to management’s friends and relatives. If they are, research if they have a good reason. If they don’t, then avoid the investment.
Leadership is more skill than a trait. Management must inspire others to follow their lead and to continue following it afterward. This extends beyond those who work within the firm; it also encompasses clientele and customers. Persuading others to follow is not enough, retention is equally important. Skilled employees need to be convinced to stay with the firm. When skilled employees leave the firm new employees must replace them, retrain, and take over their existing business relationships. This transition results in temporarily lost performance and potentially lost clients. Externally, customers must be served so they continue business. Customers lost are also customers which must be replaced in order to retain post expense profit levels. In order to keep clients, management must direct their employees to properly serve the firm’s consumers. It always comes back to leadership.
Good Management realizes it has priorities. They are primarily responsible for the shareholder’s investment, and the client’s satisfaction. It is the job of management to responsibly earn a return for the shareholders of the firm which employs them. They must responsibly provide products and services to the clients of the firm, creating value above and beyond the costs. If they fail to do so, there is no business, and they cannot responsibly provide a return for the shareholders.
Management teams directly control the financial future of others. This means they must be completely responsible with the firm’s finances. They must be completely accountable for all transactions the firm is involved in. Fraudulent activity kills businesses and the investments of shareowners. Management should avoid withdrawing money from the firm for personal usage in any form or any fashion. They should never abuse loopholes to gain money from the firm that is not assigned to them. This can include borrowing money from the firm, manipulating relationships between stock prices and options, or giving firm finances to family members. They should not receive excessive perks which are paid for by the corporation. All the luxuries of life that management enjoys should be paid out of their own personal salaries, which should not be raised to pay for personal expenses. Under no circumstance should they extend corporate perks to those who do not work for the firm, including close friends and family members. If these restrictions seem extreme it should be remembered that the managers lead, and the employees follow their example. Management that steals is followed by employees that steal.
You must seek management who runs the firm as an investment. These teams will have a long term perspective. Always prefer executive teams with the same priorities as investors: low debt, low interest payments, controlled expenses, conservative spending, high reinvestment, and value based courses of actions. They’ll retire high rate debts, avoid high-risk actions, and skip overpriced assets or interest expensive situations. Good management creates a firm which matches investor’s desires, and this correlation does not occur by accident.
Management teams should spend thriftily. This is definitely true in their professional lives but should be equally true in their public lives. You should be wary of flashy executives, who crave “all expenses paid” vacations, jewelry, mansions, resort homes, exotic cars, private jets, and personal islands. This is something to be weary of if executive teams pay out of pocket and avoid entirely if the firm finances their lifestyle. Greed or Extravagance at the cost of the firm is to be avoided. Pay attention to the proxy statements and news reports regarding an investment’s managers. Beware if they’re taking large salaries and exorbitant benefits. Large bonuses and hundred million dollar paydays fuel this excess, and these managers won’t think there’s a single thing wrong with that. Financially Conservative teams are always preferable to big spenders.
An executive team which manages the firm wisely over long periods of time has nothing to hide. They will be completely and totally honest with shareholders, except when information requested compromises potentially profitable actions. Even when discussing mistakes, management should not hide, avoid, ignore, divert from topics, or attack the people raising the issue. They will openly discuss the issue at hand, even if their performance on the issue has been sub-par. Good management is candid and open about mistakes. They are willing to find solutions with shareholders and discuss problems. Management hiding mistakes may be more concerned about retaining their position than solving issues.
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