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Why evaluating company management is important in value investing

Updated: Apr 9

Value investing has long been associated with metrics, ratios, and financial figures. However, digging deep into the nuances of a company requires investors to have a good look beyond the numbers and evaluate those at the steering wheel: the company’s management.

Photos of Warren Buffet and Charlie Munger discussing business.
Source: CNBC

In fact, Warren Buffett notably emphasized, “Charlie and I look for companies that have able and trustworthy management.”

But how does one go about evaluating company management?

Let’s dive into some criteria that can help us better evaluate those sitting in the captain’s chair, steering the ship of a company towards success or failure.

1. Integrity and transparency - The cornerstones of trust

When we talk about evaluating company management, two big ideas stand out: integrity and transparency. Think of them as the building blocks of trust in business.

So, what are they exactly?

Integrity means doing the right thing, even when no one is looking. In business, this means that the company leaders make decisions that are best for the company and its investors, not just for themselves.

Transparency means being open and honest about what’s going on. It’s about sharing information with people - the good and the bad. So, if a company is doing well, they let people know. And if they’re facing challenges, they don’t hide it.

Together, these values create trust. People are more likely to invest in or work with companies they trust. They believe that the company is being honest with them and that it’s being run the right way.

Sadly, not all companies follow these values. Take Enron as an example.

Logo of Enron
Logo of Enron

It was a large energy company that many people thought was doing really well. But behind the scenes, the company’s leaders were hiding information and making grave decisions to make more money for themselves. When the truth came out, the company’s value crashed, jobs were lost and investors lost their money.

Companies that trick people will succeed for a short time, but in the end, the truth comes out. It’s a lesson for investors to always look deeper than the numbers and understand how the company is really being run.

2. Length of tenure in leadership

When a leader or a team has been running a company for a long time, it can tell us a lot about them. Think of it like a captain who has been sailing the same ship for years. They know every corner of their ship, the best routes to take, and how to handle big storms.

A CEO who has been with a company for many years has seen it all - the good times, the tough times, and everything in between. They’ve learned from mistakes and have celebrated big wins. All these experiences give them a unique understanding of the company.

A good example is Jack Welch.

He was the CEO of “General Electric” for 20 years. That’s a really long time! His long time as a leader showed he knew how to run the company and handle any problems that came up.

In simple words, when a leader has been with a company for many years, it often means they’re doing something right. And for people looking to invest or work in that company, it’s a good sign that the company is in capable hands.

3. Management’s role in debt handling

When we’re checking out how well a company is managed, we have to look at how they handle their money. Are they making wise decisions or are they being careless?

Think of it like this: If you had a friend who kept buying expensive things without thinking about how much they owed others or if they could really afford it, you’d probably be worried about them, right?

This is kind of what happened with a company called Blockbuster. They were everywhere, opening store after store. They wanted to grow fast, but they borrowed a lot of money to do it, resulting them an enormous debt.

Now, here’s the twist. While Blockbuster was busy with its stores, technology was changing. People watch movies online or rent them from machines in grocery stores. Blockbuster didn’t react fast enough to these changes.

So, they had two big problems: a lot of debt and outdated stores. Even though they caught up, it was too late. They couldn’t keep up with their debts and the changing movie-watching habits of people.

The lesson here? It’s very important for company leaders to think ahead and be smart with their money. They need to monitor what’s happening around them and be ready to adapt. If not, they will end up like Blockbuster.

4. The power of decisive action in the face of change

Every company will face problems or bumps on the road. But what makes a company really special is how its leaders handle these problems. Outstanding leaders turn problems into opportunities.

Microsoft had such a moment. They were doing well, but the tech world was changing. More and more things were moving to the Cloud.

When Satya Nadella became the CEO of Microsoft, he saw this change as a chance to do something new. Instead of sticking to the old ways, he guided the company towards this new Cloud era. They started offering their popular tools, like Office, in a new, online version. This shift helped Microsoft stay relevant and successful.

This story about Microsoft teaches us that when companies face problems, strong leaders don’t give up. They adapt, they innovate, and they find new ways to succeed.

5. A focus on long-term vision

Some leaders have their eyes on the finish line, even if it’s miles away. They don’t get distracted by what’s popular right now. Instead, they have a big goal in mind and they stick to it, no matter what.

It’s like planting a tree. Some people might see a tiny sapling, but influential leaders see the tall, sturdy tree it will become in the future. They water it, protect it, and give it time to grow.

Elon Musk standing beside a Tesla car
Elon Musk with a Tesla vehicle

Tesla shows us what this looks like in the real world. Led by Elon Musk, Tesla believed in a future where cars run on clean energy instead of gasoline. When they started, many people thought electric cars were a cool idea, but not something everyone will want.

But Elon Musk had a bigger vision. He saw a world where all cars were electric and didn’t harm the environment.

He didn’t let doubts, or challenges stop him. He kept pushing, improving, and now, Tesla cars are popular all over the world.

This Tesla story reminds us that the best leaders think ahead. They’re dreamers, but they also work hard to make their dreams come true. They show us that big ideas can shape the future if you stay committed to them.

Final thoughts

When we think about investing in a company, we often look at the numbers, like how much money they’re making.

But that’s one part of the story.

It’s also important to look at who’s running the company.

Imagine a ship on the sea. Numbers are like the maps and compasses that guide the ship. They’re important. But the ship’s captain - the one making decisions - is just as important.

So, if you’re thinking about investing your money in a company, don’t look at their profits or sales. Understand the people leading it. Are they smart? Do they make excellent decisions? Have they done well in the past?

To put it simply, good leaders can make a company succeed, while poor leaders will let it down. So, next time you’re thinking about where to invest, remember to check both the numbers and the people in charge.

It’s like making sure both the map and the captain are good before setting sail!


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