The Importance of Assessing Management Quality

You would have read the news about incidents where regulators have to step in to investigate fishy business conducted by the managements.

https://www.straitstimes.com/business/kimlys-top-executives-arrested-for-alleged-involvement-in-giving-false-or-misleading

https://www.channelnewsasia.com/news/business/no-signboard-ceo-arrested-and-on-bail-amid-probe-into-share-11496908

https://www.businesstimes.com.sg/government-economy/allied-techs-missing-s33m-law-firm-says-partner-jeffrey-ong-may-have-ordered

Now how are we able measure the quality of the people who manage the companies that we are putting our money in? Is there a way to spot the bad guys? Usually when we measure management quality, we all look at tangibles like growth prospects, profit margins, return on equity, debt/equity, balance sheet and cash flow performances, compensation, etc.. These are certainly a few important parameters to watch out for.

But sometimes it has been the intangibles – like managers’ behavior with his/her subordinates, their soft-spoken nature, their calm appearance, consistency in their spoken words and actions – that has played a big role in the final decision-making process. Because I only invest when I like what I see.

Now such intangibles cannot be quantified (well, because they are intangibles). Any value you put on the business because of such things like leadership qualities, integrity, kindness in dealing with other people, etc. is always going to be highly subjective.

It is something like marrying someone who just has good looks, rich and smart, but lacks character. Similarly, it would be an unhappy proposition to invest with such management too.

So, please choose very carefully the people you want to bet on with your hard-earned savings. Look at their experience and abilities in running the business, but also look at their behavior in dealing with people. This is because people behave the same way in all aspects of life. The way they deal with people would be same as they way they drive on roads, and how they manage businesses.

One of the methods I try is to go to their Annual General Meetings. This way, I can see how they present themselves, react to uncomfortable questions and how they response to shareholders like myself. Of course, just one interaction isn’t enough to tell you the true nature of the other person, but I was simply hoping to catch some insights on the nature of the people managing businesses I was vested in.

Another way is to read up on their Annual Reports and check if they have been achieving their targets eg. target to open xx number of shops in 2018 vs how many shops are actually open. Or target date for fully operational factory in xx date vs actual fully operational date.

You may go wrong in your assessment of their experience and abilities, because that is where you will use your brain. But I feel that you will rarely be wrong in your assessment of their behavior, because that is where your intuition will play a key role.

Cheers

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s