# Security Analysis: Four Ways to Evaluate the Quality of Management

While evaluating a company from the perspective of value investing, an important aspect is the quality of the company’s management. Almost everyone has a strong view about it but there is really no objective way of doing so. We do not have any objective, reliable tests to measure the competence of the management. Let’s say that a company is very successful and making millions of dollars per year. By looking at these numbers, can we really say with confidence that the management is competent? There are many factors that could have contributed to the success and growth of the company. It’s not to say that the management didn’t play a role; but the management’s contribution is difficult to assess.

When considering the impact of management competence on the value of a security, we also need to be aware that its impact would already have been incorporated in the stock price. Only when there is something new, such as a change in management, that the market doesn’t know about or is yet to incorporate, do we need to worry about the management. Nonetheless, there are a few factors/signs that we can study to understand how the management is doing to increase shareholders’ value. These factors primarily relate to the conduct of the management. We can read the previous annual reports and read what they have said and then read the follow-up reports to see whether they actually did what they said in the previous years. It is important that the management accepts its failure to keep the promises rather than try to hide it. Such information can be found in the Management Discussion section and also spread throughout the annual report.

Is the CEO paid too much?