How well do you know your spouse or children? You might have stayed with your spouse and kids for many years but can you say for certain you know every single thing about them? Knowing about people in-depth is a very challenging task. In the same way, when researching into a company, the most difficult task to ascertain is the integrity of management. However, that doesn’t mean you can chuck aside this nebulous part when researching into a company. Looking into the management is one of the most important aspects of investing. If you don’t know who’s running the company, how are you going to trust your hard-earned money with them?
To get a glimpse of the management’s integrity and competence, you can read the Chairman’s statement that is in the Annual Report of the company you are interested in. You have to read the statements from all the years since IPO. If this is too tedious, at least read the past five years of the Chairman’s statements. By reading the statements, you can know the style of the management and if they have delivered on their promises. If in the past, the company has promised future growth, discern if the promise has been upheld. Also, look for frank and candid way of admitting any mistakes made. Check for consistency over the years. Do note that the Chairman’s statement is usually beautified to promote the company so you should always read the statements with a pinch of salt.
You can also look at the profiles of the managers and directors of the companies. How many years of experience do they have? What are their achievements so far? What educational qualifications do they have? Also, look at the company’s mission statements, vision and goals. Does it empower the employees to strive towards a better future for the company? Or is it just corporate hoopla?
You can also go to the company’s Annual General Meeting (AGM) and look at how the meeting is conducted. Is it conducted in a business-like way? Also, notice how the managers and directors carry themselves when interacting with people. Are they humble? Are they approachable and friendly? Are they forthcoming? Observe the body language of the management when someone hits the nail by posing difficult questions about the business. You can ask certain questions during the AGM that will uncover the management integrity and competence. If you are not a shareholder of the company, you can email the Investor Relations department and request to attend the AGM as an observer. However, you will not be allowed to ask questions as an observer, usually.
When you are at the AGM, you can also question non-shareholders and non-stakeholders like cleaners, deliveryman, etc on how the management interacts with them. Do they treat them with respect and smile at them? Are they friendly towards them? This can be one of the best ways to uncover the integrity of the management.
On top of that, check the SGX filings for insider ownership and for any share buybacks done. Insider ownership allows the management’s interest to be aligned with the shareholders’ interests. Note that share buybacks should be done when the company’s share price is undervalued and not when it’s overvalued.
Also, check the compensation package of the management and directors and ensure they not overly paid. They must be paid according to their performance in the company. The compensation is revealed in the Annual Report. Also, ensure that the compensation is in line with peers.
Management competence can be found from the financial statements. Are the margins high and are they increasing over the years? Is the ROE high and increasing over the years? Are the retained earnings and free cash flow increasing over the years? All these reveal if the management is capable enough to increase shareholders’ value.
In conclusion, knowing the integrity and competence of the management is paramount when investing in a company. The integrity and competence of the management can be found from the Annual Reports, by going for AGMs and by looking at insider ownership and the financial statements, among others. For a bettor betting on a particular horse to win a race, he has to know if the jockey is capable enough and has experience. Similarly, as an investor, we have to uncover if the management is competent and has integrity so that we will know our money is in safe hands.