How to Select a Stock- Part VI- Management Quality

While investing in stocks, one very important issue is that whether you can trust the management of the company for taking it to greater heights in future. If you can’t trust the management, you can’t trust the stock for giving you good returns. Let me explain. Imagine that you are going on a cruise, and, suddenly, you found out that the captain of the ship has been through three shipwrecks earlier; and on all three occasions he saved his life and left all passengers to die. What will you do? Of course, you will cancel your plans of going on that cruise. You got the point. Even if the business fundamentals are strong for a company, poor management can, and will, take it down.

There are a few things that you need to assess in the management of the company.

Focus: A sound management focuses on key issues that drive value for the business. If a management understands its role and the requirement of a business well, it will focus on taking actions that will drive growth and profitability of the business. However, if you notice that the management is focusing on unimportant or inexplicable issues, you should be wary of investing in such companies. If you notice that the management is not able to do justice to its current business and is trying to diversify into seemingly unrelated businesses, this could be an indication that the management is indulging in diversionary tactics to avoid attention to their non-performance in the existing line of business. A sound management knows its business well and focuses on building it by venturing into territories it can traverse well.

Past record & Consistency: Check out the past record of the management and see how they have grown business in the past. Go through past annual reports, dig into the management discussion and analysis section and see how they have been faring on their plans and promises on year-on-year basis. If you see lack of consistency on promises, plans, actions and results, there is a reason for you to investigate further.

If the management has been indulging more in media activities than on business, there might be a need to look into the capabilities of the management further. If there has been
a change in the top brass of the company recently, you need to check the past records of the recently joined management personnel.

Do look into the share buy-backs announced by the company. If the share buy back has happened at the time when the stock prices are down and below the ‘intrinsic value’, it’s a great thing for a stockholder. It will most probably result in increased value for shareholder in future. However, if the share buy-backs have been announced in a bull market when the prices are hyped and beyond the reasonable value of the stock, you should be careful.

Check out how the management has grown the company year on year. If the company has allocated its retained earnings well and increased its profit with better-than-usual market rate, it’s a sign of a good management. However, if the company has not been able to grow its profits on consistent basis, and has not shared its earnings with the shareholders in the form of dividend, you have a reason to question the ability of the management.

Integrity: Make sure that the company you are investing in has got a management with unquestionable integrity. With many corporate frauds being discovered in these days, you don’t want to get trapped in a company that has falsified its records or has got management that can go to any extent to hide their actual performance. A little bit of internet search on the names of the management along with key words like ‘fraud’, ‘court case’, ‘criminal case’, etc will unearth enough details for you to consider.

Instances of crises actually give you a very good understanding of the character of the management. If the management has been candid in accepting the issues, handled the situation with maturity, and proactively taken steps to overcome difficulties, you can rest assured about the quality of management.

You should also check out management rewards announced by the company. If there are instances of management rewarding itself with plump bonuses and obscene stock options without a credible link to growth in profits of the company, you have a reason to worry.


In conclusion, though judgment on the management quality of the company is based on many qualitative factors, you should do everything in your limits to understand this factor as it going to be the key factor that will decide the future earnings through your stock.

In the next post, which is going to be the last post in this series of ‘how to select a stock for investing’, I will explain a few basic things that will help you decide how you can identify a right price for a good stock.