How to spot a honest and competent management?

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without [integrity], you really want them to be dumb and lazy.” -Warren Buffett

The part about “honest and competent” management of Warren Buffetts criteria is something that is often missed in a stock-analysis, often followed by this Quote: “I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.” from Warren. Analysts are more numbers-peoples who avoid to looking at soft-skills. I think this is a mistake and I will try to look more at characteristics of the management of companies in the future – I want to get better at analysing them.
Vernon Silver and Elisa Martinuzzi wrote this very interesting and eye-opening article about how “How Deutsche Bank Made a $462 Million Loss Disappear” at Banca Monte dei Paschi in 2008. I recommend it highly. bloomberg- how-deutsche-bank-made-367-million-disappear

.. was down €367 million on a single investment. Losing that much money was bad; having to include it in the bank’s yearend report to the public, as required by Italian law, was arguably much worse.

For one half of the deal, Paschi would make a sure-thing, moneymaking bet with Deutsche Bank and use those winnings to extinguish its 2008 trading losses. Of course, Deutsche doesn’t give away money for free, so for the second half of the deal, the Italians would make a bet that was sure to lose.

Here is the 2008 Financial Report of Paschi (link)

Conclusion

If criminal energy is involved and the Management tries to betray the shareholders (or at least don’t present them the thought) it is really hard to discover this timely – I would say for a non institutional investor it is virtually impossible. My conclusion from this is: It needs an honest management whom you can trust for me to own the stock, in best case with skin in the game – otherwise buy an index-funds.

 

How to do this

It is not easy to evaluate the caracteristics of people – especially from a distance. This would be the creterias that I like to see in a managemnt team:

  • never was involved in sleazy actions (especially against shareholders)
  • humble appearance like at InvestorAB or Warren Buffett (the opposite of show-offs)
  • reasonable capital allocation (did they buy in 2009?)
  • communicate misstakes (early), assume responsibility (don’t blame the weahter)
  • owner owned (is not neccesary but adds some safety)
  • no exessive salary (1-$ managements ?)

 

 

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6 thoughts on “How to spot a honest and competent management?

  1. This is really an important topic. And a very hard one to handle.

    What I like to do is reading/looking at transcripts (earning calls, company presentations, …), especially the Q&A sessions. I cannot say what to look at specifically, but one thing I look for, is: can I learn about the business when reading/looking? Because when I can, I have the feeling, that the people do really care. If management only tells stuff like “revenue grew by x%” or other stuff that is obvious from reading the related report, I have a bad feeling.

    However, there is no “how to” in evaluating the management. But these situations are often the only ones where you can get a little bit of insight into how the acting persons “tick”. Since I cannot talk with them face to face, this is at least a little bit of insight. And I really like the Q&As, especially the questions for which management cannot prepare 😉

    LG
    Tom

    Like

      • Hi Tom,
        Thank you for your comment! You are right when you say „I cannot say what to look at specifically”. I would agree that to make a simple checklist doesn’t help in that case. The Idea with the earning calls is good.
        For me the number one priority is to get a feeling for the honesty of the management. Everything else comes far behind that.

        Obvious this manager “cares” about the operating business, but is he honest and does he care about small shareholders?

        Another (extreme) example would be S+K case in Germany. It is obvious that these show-offs only think about themselves. I think these pictures make it clear what is the direct opposite of what I am looking for.

        Like

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