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.