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Get Tough On Management Puff

Investors examining company fundamentals cannot afford to ignore the role of

management. It is critical for investors to see, as much as they can, that

management is both capable and honest. The trouble is that it's not always easy

to cut through dressed-up conference calls and published financial statements

in order to accurately judge the competence of top managers.

Good Management Can Be an Illusion

It's not hard to tell from WalMart's share performance over the decade

preceding 2003 that the retail giant's top managers know a thing or two about

running a business. From the stellar growth of Dell Computers, investors can

recognize the first-class leadership of the company's founder and CEO, Michael

Dell. That said, the idea that a rising share price means management must be

doing a good job doesn't always hold water; investors who once championed CEO's

like Enron's Kenneth Lay or WorldCom's Bernie Ebbers but later suffered the

consequences of fraud and bankruptcy can attest to that.

Remember, if company management is set on fooling investors, the cards for

doing so are stacked in its favor. Say you went on a tour of a manufacturing

company hosted by the firm's CEO. You might be wowed by the CEO's detailed

knowledge of new, state-of-the-art factory equipment that would soon boost

efficiency and profitability. You might see the CEO put an arm around one of

the factory floor technicians and say, "Stan has been with the firm for nearly

15 years. How's the new baby, Stan?" No doubt, you would go home thinking the

CEO possessed a valuable combination of technical knowledge and personal

relationship skills.

You might be right. On the other hand, it could be that the CEO had studied the

details of just one or two pieces of equipment and built his relationship with

Stan that morning. Furthermore, one can imagine the CEO steering conversation

away from production delays or sluggish growth to more uplifting news like the

latest acquisition. The point is that management will present itself in the

best light possible, making it awfully difficult for investors to get a clear

view of its real capability.

Fortunately, finding good management is not completely hit and miss. There are

ways of checking and monitoring management quality to ensure that it is not off

track.

Company Visits

Formal tours are rarely possible, especially for individual investors. But a

quick, unscheduled visit to one of the company's offices can offer a glimpse of

the general behavior and attitude of the executives and employees. Is the

telephone answered quickly and courteously? Is the receptionist on the ball?

Are employees enthusiastic about the company and its prospects? In other words,

is there a sense of team spirit?

Presentations and Conference Calls

In practice most companies allow Wall Street analysts to pose questions first.

Increasingly, journalists are also invited to ask questions. Most companies

draw the line at letting individual investors ask questions, unless they hold

big positions in the company. Mom-and-Pop investors are usually out of luck;

they are almost always denied an opportunity to grill the CEO.

Still, it is a good idea to see how well the CEO and top management field the

questions of analysts and journalists. How well do the managers answer

questions concerning company disappointments? Does management have a decisive

plan to remedy the disappointments? Does the management team have answers at

the tip of their tongue for every question, or do they fumble through papers

and struggle to provide answers to even simple questions? Do the CEO and CFO

pass questions to one another seamlessly, or are both unsure of answers? Bear

in mind, that, even at analyst presentations, management often prepares a few

questions and arranges to have them raised.

Published Reports

Do not be distracted by lavish annual reports filled with color photographs of

the CEO and top executives. These glossy documents provide no bearing of the

company or management's quality. It is important, however, to read the

chairman's statement and compare the cited achievements against those expected

in the previous year's report. Of course, the auditor's report should be

checked to ensure that there is no qualification of any kind. Always read the

notes, as this is frequently where important points are tucked away.

Meeting Forecasts

Management that fails to meet formal performance targets or earnings forecasts

could be on its way out. Investor backing will be harder to secure next time it

is needed, so additional access to capital might be jeopardized. Failing to

meet analysts' forecasts can be dangerous; highly-paid analysts will

necessarily want someone to blame.

Conclusion

Because past share performance does not necessarily guarantee quality

management, it is important to take a closer look at who is heading the

company. Good leadership is essential for any business, so keep an eye on

qualitative measures like those mentioned above to get a sense of a company and

the management that runs it.

by Ben McClure