Most investors realize that it's important for a company to have a good management team. The problem is that evaluating management is difficult. So many aspects of the job are intangible.
It's clear that investors can't always be sure of a company by only poring over financial statements. Fallouts such as Enron, Worldcom, and Imclone have demonstrated the importance of emphasizing the qualitative aspects of a company. There is no magic formula for evaluating management, but there are factors to which you should pay attention. In this article, we'll discuss some of these signs. Strong management is the backbone of any successful company. Employees are also very important, but it is management that ultimately makes the strategic decisions. You can think of management as the captain of a ship. While not physically driving the boat, he or she directs others to look after all the factors that ensure a safe trip. (For further reading, see Lifting The Lid On CEO Compensation.) Theoretically, the management of a publicly traded company is in charge of creating value for shareholders. Thus, management should have the business smarts to run a company in the interest of the owners. Of course, it is unrealistic to believe that management only thinks about the shareholders. Managers are people, too, and are, like anybody else, looking for personal gain. Problems arise when the interests of the managers are different from the interests of the shareholders.
The theory behind the tendency for this to occur is called agency theory. It says that conflict will occur unless the compensation of management is tied together somehow with the interests of shareholders. Don't be naive by thinking that the board of directors will always come to the shareholders' rescue. Management must have some actual reason to be beneficial to shareholders.