Tips to Analyze the Management of a Company for Investing in Stocks: “There are no bad companies, only bad managers”. You’ll hear every great investor stress the importance of a company’s management. But for retail investors like us, it is hard to directly assess the management. There is no CEO that would deny an investor like Buffet but unfortunately, that does not hold true for everyone.

In this article, we are going to discuss how to analyze the management of a company for investing in any stock. Here, we’ll identify the factors that we can look into, in order to assess the management of a company

How to Analyze the Management of a Company for Investing?

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The executives that run a company are responsible for shaping the future of the company. We often don’t realize that ultimately a company is run by humans. Due to this assessment, the management quality is often overlooked.

On the other hand, management quality isn’t quantifiable and unfortunately, we cannot use interactions to judge each management. But despite this, there still are a considerable number of factors that help retail investors assess the quality of management. They are mentioned below:

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1. Background of Promoters / Top managers

The very first step in assessing the management quality would be finding the background of the top management and promoters. This would include their accomplishments, the performance of the company under them, and any other relevant information.

If they have accomplished good and stable growth for a considerable period (10 years) it could be a testament to their leadership. On the other hand, if we come across news that portrays the management in a negative light it’s better to stay away from the individual. Thankfully due to technology, this can be done simply by googling the individuals’ name. This information can also be used to assess the competence of the promoters and management. 

2. Promoter holding

It is also important to note the stake held by promoters in a company. Promoters holding a 50% or more stake in a company is a good sign. On the other hand, promoters holding a low stake in the business and news that they may keep selling is a red flag. Another sign could be Institutional investor holdings.

You can find the promoter’s holding of any publically listed company on Trade Brains Portal. Simply, go to Portal, search the company name and navigate to the Shareholding pattern section.

3. Future Plans, Strategy, and goals

It’s really important to check the future plans, strategy, and goals in order to analyze the management of a company for investing in any stock. For it, simply start by going through the Vision, Mission, and Value statement of the company.

Together, mission and vision guide strategy development, help communicate the company’s purpose to shareholders and inform the goals and objectives set to determine whether the strategy is on track. Hence, these defined future statements for the company can help an investor to decide whether to select a stock to invest in the Indian stock market or not.

4. Remuneration of the Managers

The remuneration paid to managers is made available through the annual reports. This parameter gives us an insight into the aims of the managers. One of the major factors to look for here is the proportion of managerial remuneration increase in comparison to profits.

If the company has performed negatively in terms of profits but the CEO gets a raise, it is a sign of poor leadership. Also, the % increase in remuneration is higher than the % increase in profits is another red flag. One can also compare the salaries of the CEO within the same industry in order to understand the difference.

Further, also look into perks to the employee. If the company is giving good perks to its staff and employees, then again it’s a sign of good management. The performance of a company depends a lot on the performance of its staff and employees. Happy employees will give their best performance. However, if there are continuous strikes or increasing worker union demands, then it means that the management is not able to fulfill the needs of its workers and employees. Such cases are a bad sign for investors in the company.

5. Communication & Transparency

Communication and Transparency are the most important factors while judging the management. The integrity of the management is the key to the growth of the company. It’s the management’s duty to give ‘fair’ quarterly and annual results to its shareholders.

Just as the management announces the good results of the company proudly; in the same way, the management should come forward in times of bad results to explain its reasons to its shareholders. Good management always maintains the transparency of its organization.

In 2018 Elon Musk received a lot of flak after he tweeted “Am considering taking Tesla private at $420. Funding secured.” This however was false and Musk had to later suffer the consequences from regulatory authorities.  This was an example of poor communication. 

Being at the top of a company it is important that CEOs communicate things as they are and do not hide or manipulate information or as seen above play pranks.


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6. Key Directors and chairman

It is also important to have a background check on other individuals in top posts too. This includes the board of directors, chairmen, independent directors, etc. We also often see bureaucrats appointed to the board as independent directors.

Although they may bring significant administrative experience. The post is at times offered in return for other favors like govt approvals etc.

7. Emphasis on Share Price

Often Share Price is used to measure the success of the promoter/ managers. Although the managers are expected to create wealth for investors it is not healthy for the top management to take decisions solely on the share price.

The top management obsessed with the share price is a red flag. These managers may not take decisions that might be better in the long run if it affects the shareholders in the short term. It’s also important to note that the Share Price of a company is a function of market forces. 

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8. Related Party transactions

Another important section of the annual reports is “Related Party Transactions”. This section represents the transaction that the company had with the promoter’s other entity or their relatives’ entity, joint ventures, etc. This section would reveal details if the promoters profit from the company at the expense of other shareholders. Hence the section must be studied in detail.

9. Management Forecast

The annual reports also include sections like the  “The Directors Report”, “Management Discussion and Analysis”. These reports show the plans of the management and projections about the future of the business. 

10. Capital Allocation 

Capital Allocation is the manner in which the management uses the free cash flows in a company. These include reinvestment into the business, paying dividends, holding as cash, etc. The skillset of a CEO is also determined by observing how he manages to manage the cash in order to keep the investors happy and grow the business.

Generally, the cash in a business is generated through its profits. But on receiving dividends, investors must also identify the source. In 2014, companies like L&T, Hindalco paid out dividends even when the company’s net debt to Ebitda increased.

11. Promoter’s buying and share buybacks

The promoters of the company have the best knowledge about the company’s performance. The management and the top officials can understand the future aspects of the company and if they believe that the company will outperform in the future, they are mostly correct. Therefore, promoter’s buying and share buybacks are signals that the owners trust in the future of the company.

In addition, the other scenario, where the promoters or CEO is selling some of their stocks, is an independent activity and cannot be treated as a bad signal. We cannot judge the company’s future just because the promoters are selling a small portion of their stocks once in a while. Maybe, the promoters need money to start another venture, buy a new house or enjoy a vacation. Everyone has the right to sell stocks when they need them the most, and so do the founders.

In short, the promoter’s buying and share buybacks are signals of a good company. However, we cannot judge the company’s future based on the promoter’s selling some portion of their stock. Anyways, if the promoters are selling a lot of stocks continuously without explaining the reason, then it’s a matter of further investigation.

Closing Thoughts

In this article, we discussed how to analyze the management of a company for investing in any stock. The importance of a quality management team cannot be stressed more. This also forms an important part of qualitative analysis.  Only considering the financial results does not give us the full picture of the business. Using the factors mentioned above will give us a clearer picture of the business. Happy Investing!

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