Management Quality Analysis | Value Investing Blog

 Management Quality Analysis

Management Quality Analysis should be done on the basis of Competence (nature or level of expertise) & Capability (ability to use that competence) of management. Management Quality Evaluation is an very crucial part of value investing, as we all know it’s important for a company to have a competent & capable management – for creating value for shareholders. The problem is that, we can not evaluate management’s effectiveness just by reading financials. Recent fallout’s such as Punjab National Bank, Pincon Spirit, Satyam have demonstrated that why we should also be analyzing qualitative aspects of a company.
There is no magic formula for evaluating management quality, but there are some factors which needs attention. Good management is the backbone of any successful company because all the strategic planning & decisions making is done by top management or those charged with the governance. The primary responsibility of Management is to create wealth for shareholders.

But the objectivity of management can be affected by many factors viz conflict of interest, bias nature, undue pressure to achieve a financial target which is practical not possible. The price of a stock does not determine the effectiveness of management. As per efficient market theory the prices of stock reflects all the relevant information, but its now highly discredited.

The point to note is that management’s ultimate objective is to create value for shareholders, but in some cases it is diverted to just present good quarterly results. And the prices are determined on the basis of financial results & future prospects. So price can never be a determining factor for evaluation management quality.
The tenure of Key Managerial Persons – plays an important role for quality analysis. For how long a managerial person has been serving & directing the company is a factor to consider as it reflects stability.
Insider buying & selling of securities always give an indication of what’s coming.
The mission & vision of the company reflects the ambitions & it creates individual goals for the managerial persons, officers & employees. The strategies & plans implement to achieve this goals will help us to understand the potential of management.
Further how the employees feel &thinks about the company & management is also very useful source of information for the evaluation management quality. There is a website named Glassdoor – where employees share their experiences about working in the respective company.
Increasing trend in remuneration & stock options requires attention. There have been many cases where management did whatever it took to shoot up the prices of stock, so that they can make money through their stock options.
In Annual Report details about attendance of directors in Board Meetings is given, it can help in determining which directors are taking active participation in the business of the Company.

Now the main question which remains unanswered is that where to get detailed information about each & every – Director and Key Managerial Person (M.D, CEO, Directors, Company Secretary)

As per Companies Act, 2013 and the Rules made there under :–

The company is required to maintain a Register containing detailed information about the management including the securities held in the company or its subsidiary or associate.

As per the Rules – the register shall also content following details :-

  • Director Identification Number – DIN, Name, Former name, Surname, Date of birth, Nationality etc. 
  • Date of appointment / re-appointment.
  • Date of cessation of office – with reasons.
  • The number, description of nominal value of securities.
  • Date of acquisition & the price at which it was acquired.
  • Date of disposal & the price of disposal.
  • Cumulative balance of securities held after each transaction.
  • Mode of acquisition – physical or dematerialized form.
  • Whether securities have been pledged.

The Companies Act, 2013 also gives Right to Member i.e Shareholders – To INSPECT this register maintained by the company. Further it also gives the right to take extracts from register or make copies from it.

If a shareholder request the company for copies from register or extract from it – than the company has to fulfill the request within 30 days, at free of cost.If company refuses to allow inspection of register or supply copies – than the shareholder can make an application to Registrar of that company and Registrar shall pass an order immediately.

If the company contravenes with the above law than :-

The company along with each & every director, officer – who is at default – shall be punishable with a fine of Rs. 50000/- (minimum) up to Rs. 5 lacs.

If you are new to the world of investing then here is the advice by the – Most Successful Value Investor and Billionaire Warren Buffett.

He said that the best advice he got was from his holy bible, The Intelligent Investor, written in 1949 by value god Benjamin Graham. He further said that, “Chapters 8 and 20 have been the bedrock of my investing activities for more than 60 years,” he says. “I suggest that all investors read those chapters and re-read them every time the market has been especially strong or weak.” – Download

Thank you for reading. Share it if you want to let other investor know about it.

Leave a Reply