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Consider these factors when evaluating company management for stock investing

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When it comes to picking stocks for long-term investing, there are certain qualitative and quantitative measures to assess investment viability. One of the important qualitative factors is the management quality which can materially impact an investment decision.

Consider these factors when evaluating company management for stock investing
When it comes to picking stocks for long-term investing, there are certain qualitative and quantitative measures to assess investment viability. One of the important qualitative factors is the management quality which can materially impact an investment decision.
Apart from running day-to-day business and generating profits, managements are also responsible for:
I Steering the company during good and bad times effectively.
II Ensuring optimum capital allocation and continuous revenue growth.
III Creating shareholder value.
IV Driving and maintaining high corporate governance standards.
There are no set rules for measuring the competence, vision, strategy, execution effectiveness and hence the quality of management. However, there are certain indicative parameters with which a reasonable assessment can be made. Let us review some of these effective parameters:
Background check
This should be carried out for the CEO as well as for other Key persons. Some information would be available publicly, some of it will need to be extracted by a thorough and structured search through search engines or other means. The qualifications, tenure and track record should be taken into account while evaluating the management.
Relevant industry experience and education, years in the same or similar industry or business, clean record, significant business achievements – these are some of the aspects which should be looked at while evaluating the management background.
Related party activities and transactions
It is quite important to check if during the financial year there were any transactions carried out by the company with the owners and/or any other related concerns, companies were created for diverting money, companies were established in the name of immediate family or relatives, joint ventures or personal holding companies. Such transactions should be studied minutely so as to identify siphoning off the company's money by the owners or management at the cost of the shareholders.
Accounting practices
Falsifying accounting books is the easiest way for management to misrepresent or show inflated levels of Inventory, cash in hand, receivables, enhanced sales, high or low level of debt, profitability or revenue growth where there is none. Accounting malpractices can sometimes be difficult to identify, but once identified, the share price can take a huge beating. Management associated with such cooking of books will find it very difficult to win back investor confidence.
Other major indicators are - frequent change in auditors and /or unusually high auditor fees.
Management commentary
This is an important source of information. This is normally seen as the strategic roadmap of a company and is taken seriously by shareholders and potential investors alike. It contains the forecast of the management with respect to its vision and guidance for the company’s future growth. If a business is diversifying and the area of operations is connected to the core business, it is supposed to be positive. The Director’s or CEO’s comments should have a direct relationship with what the company is currently pursuing and with that which it wants to do in the future.
Remuneration
The remuneration paid to the top-ranking persons like CEO, CFO, CXO, and the likes would give an idea about the culture prevalent in the company and also about the management’s seriousness about creating greater transparency. Companies across industries have different pay scales and thus, key management personnel at the same level take in different amounts as part of their packages. The remuneration structure is different as well and is dependent on various factors. In some cases, the total compensation is linked to the profitability ratios, share price appreciation, stock options, business expansion, etc.  Although there is nothing black and white as far as remuneration is concerned, exorbitantly high packages and/or commissions should act as a trigger. There can be instances of rising remuneration in spite of poor business performance. Share price management through Balance Sheet manipulations due to high stock options is another red flag.
Succession plan
A management’s competence can also be judged on the basis of its ‘second in line’ structure. A company, to remain a ‘going concern’ should have a strong, stable and futuristic structure in place. A clear succession planning mechanism goes a long way in reposing investor and general faith in the management of the company.
Look for red flags
Any parameter which indicates that there is something ‘not good’ should act as a red flag and definitely be researched. No matter how profitable the company is, if the management is not trustworthy, it would be prudent on the part of the investor to let it pass.
Harsh Jain, COO and Co-founder of Groww.