Question

why company management's matters?

Answer 1

Day by day a company’s management team makes decisions to allocate capital and resources to specific projects, divisions and expenses – and by default, not to others. This critical decision-making process – which is at management’s sole discretion – carves out a company’s future business path and subsequent cash flows. Since this ultimately dictates shareholder returns, management is one of the key components to evaluate when investing.Asset managers are stewards of their clients’ capital, and management teams act as secondary custodians. The odds of generating appropriate returns for clients can be tilted in a fund manager’s favour if the fund manager partners with strong, proven leadership teams.There is no perfect way to evaluate management or to distinguish easily between good and bad teams. In addition, companies aren’t static: management teams and operating environments change.

Fund managers should focus on factual, historical footprints and try to remain impartial by considering:

• Resource allocation (financial and human). Arguably, this is any chief executive officer’s most important task. However, very few of those new to the role of CEO will have any experience or training in resource allocation.
• Return on capital employed. This will drive long-term shareholder returns and should be the key consideration in any management team’s decision-making process
• Focus on cash profit. It is often said that “the top line is for vanity and the bottom line for sanity”, which speaks to the flawed focus that some management teams have on business growth, as opposed to profitability. Another common saying states that “net income is an opinion, while cash flow is a fact”. This alludes to the variability of accounting profits and management’s ability to influence these – flexibility that cash-flow .

Over and above these criteria, it’s important to invest with management teams who are directly aligned with the asset manager through meaningful ownership in their own businesses. Aligned management teams think like shareholders: they prioritise growing per-share value over growing the size of the business.Ownership is not always a foolproof assessment metric – empire-building-type CEOs may well view size as success, even if they do have ownership stakes. It is therefore critical to assess capital allocation track records.This is especially true in cyclical industries, as these businesses are cash flush with strong balance sheets at the top of a cycle. Good management teams will resist the urge – and often also pressure from institutional shareholders – to spend this money on seemingly attractive acquisitions or growth ventures that could cost shareholders once the cycle turns.Rather, they will recognise the importance of keeping cash on hand to weather the inevitable downturn and potentially deploy in an environment where prices are depressed.