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The value of picking investments with strong management teams
4 Tips for Investing in Companies With Strong Management Teams
A company’s management team is the backbone of the organisation. It influences everything from the company’s vision for the future to its strategy to achieve that vision, to the people the company brings in to execute the strategy and the culture those people work within.
Given the immense influence a company’s management team has over its operations, it only makes sense when choosing which companies to purchase shares from to look at the team at the helm. Here are four measures you can use to separate the good apples from the bad.
1. Alignment of management compensation with shareholder interests
A company’s management team usually receives substantially higher salaries than other employees of an organisation, and rightfully so. With so much riding on decisions made by the company’s top leaders, it makes sense that they should be compensated above other employees.
It is important, however, that a management team’s compensation is tied to maximising a company’s performance and share price in the short and long term. Leadership teams are made up of human beings, after all, and human beings tend to prioritise their own self-interests over others. When the management team’s compensation is aligned to the success of the company, the team’s personal interests are usually aligned to the company’s, which minimises the chances of mismanagement of the company for the sake of personal gain.
2. Length of tenure of the company’s management team
A good indicator of the quality of a company’s leadership team is how long members of the executive suite have served in their roles. Longer tenure tends to indicate a successful leader who is capable of holding the position through thick and thin, as well as someone who has amassed a great deal of valuable company and industry knowledge when compared to a leadership team that is fresh in their roles.
3. The company’s strategy and goals
When evaluating the leadership of a company, another important thing to consider if the strategy and mission they’ve set forth for their organisation. Does it align with what the market cares about? Is it realistic for the company? Does it consider what competitors are doing?
If the company’s mission and strategy are vague or unclear and sprinkled with corporate jargon to try and cover up that fact, it should set alarm bells off for you as a prospective investor.
4. Succession planning measures the company has taken
As important as it is to select a company with a strong current leadership team, the reality is that people move on, and it’s entirely possible that you’ll be invested in the company even after the current leadership team moves on.
In that event, it’s important to consider the management team’s succession plan. For starters, do they have one? If so, does it clearly define the requirements for each of the management team roles? Does it outline a plan, with clear criteria, for preparing internal talent for the next level of leadership? These questions and more all demand answers for investors to be confident that the company will continue to prosper when the current management team decides it’s time to move on.
Investing in shares of individual companies is a rewarding endeavour; those rewards are not without risk, however, and that risk is amplified when investors fail to conduct due diligence on companies they’re hoping to invest in. Evaluating a company’s management team is one of the most important steps investors can take to ensure the company is set up to deliver long-term shareholder value.
This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.