Quality of management can be an excellent predictor of future stock success. For the individual investor, unfortunately, it can also be the most difficult trait to judge. Without the millions -- or even billions -- of dollars needed to get a board seat at most firms, how can Fools like us get to know the corporate leaders we're trusting our savings to?
Good news: There are ways.
Be your own sleuth
There are five convenient means I use to do some due diligence on the leadership teams at my prospective investments. They are:
- Company employees and customers
- Proxy statements
- Press releases
- Track record at previous employers
Now, not all of these vehicles are applicable in all cases. Not every CEO has been a CEO, CFO, or board member at another public company, for example. And some company employees are harder to get in touch with than others. But together, these five investigative techniques can tell you a lot about your management team.
Walk the beat
Let's use Motley Fool Stock Advisor recommendation Dell (Nasdaq: DELL ) as our guinea pig. After all, since the company is named for the current CEO, founder, and 10% shareholder Michael Dell, quality of management has and continues to be crucial to the company's success.
Google "Michael Dell" and what do we find out? Well, we get a smiling picture at Wikipedia and a short bio that tells us Mr. Dell is good with computers and an award-winning entrepreneur. No red flags there. Google also tells us that Mr. Dell is one of the world's richest people (no surprise), a "fascinating" entrepreneur, and that he and his wife, Susan, started a foundation to help children achieve a brighter future. The most controversial revelations on the first few Google pages are that Mr. Dell donates to Republicans (gasp!) and that President Bush calls him with computer questions. (Insert obligatory wisecrack here.)
Compare those results to what you get when you Google one of the Fool's favorite corporate targets: David H. Brooks, CEO of DHB Industries (AMEX: DHB ) . In just the first 10 results, we find out that Brooks tends to sell his DHB shares, recently threw his daughter a $10 million bat mitzvah, and is referred to frequently as a "corporate crook." I'd call those red flags.
Since Fools shouldn't judge management by Google searches alone, use the other four tools to round out the picture. Employees and customers, particularly at retailers, are an easily accessible and valuable resource. As Fool co-founder and Stock Advisor analyst Tom Gardner says, "If I walk into a store and I get a sense of lackadaisical service, obviously many other customers may be having a mediocre experience. ... [The managers] aren't motivating their people."
I drove around to a few Whole Foods Market (Nasdaq: WFMI ) stores and chatted with folks from the manager to the cashiers to get the lay of the corporate land when I was considering investing. The employees were happy and focused on success. I invested and a four-bagger later, I'm happy, too.
But you don't have to stop with the employees. Hang around and wait for the distributors to show up. Give them a cup of coffee and ask if the stores they deliver to are moving their goods and ordering more or less? Sam Walton used to ride around with his truck drivers to keep tabs on his burgeoning Wal-Mart (NYSE: WMT ) empire.
The dirty details
Proxy statements will tell you who owns the shares of the company you're investing in. If it's not the CEO, who is it? Will they be friendly to outside shareholders, or will they cut and run if the going gets tough? The proxy also tells you who sits on the company board.
Dell's proxy reveals that the board is composed of independent outsiders such as Judy Lewent, a director at Motorola (NYSE: MOT ) and the CFO of Merck (NYSE: MRK ) , former Altria (NYSE: MO ) CEO Michael Miles, and Sam Nunn, a former senator from Georgia -- and a Democrat! Interesting.
The DHB board, on the other hand, doesn't have a single member with experience leading any other major company -- although director Cary Chasin formerly owned Pants Palace. (I'd never heard of it, either.) My guess is that Mr. Brooks is the strongest voice at DHB.
Proxy statements also detail executive compensation plans -- overgenerous is usually bad. Press releases are helpful for their tone. Does the company routinely overpromise and underdeliver, or underpromise and overdeliver? The latter is best. And when looking at track records, leaders with previous bankruptcies under their belts -- like Donald Trump -- are usually best to avoid.
The Foolish bottom line
Even if the numbers look incredible, make sure you know your management team before investing in a company. Companies like Dell tend to be great at creating wealth for the long term (despite current difficulties), while companies like DHB tend to be pretty good at destroying it. While investigating management can take some time, it will always prove to be worth it.
But if you'd like a preapproved list of management teams, consider a 30-day free trial to Stock Advisor. Fool co-founders David and Tom Gardner take a hard look at the people in charge of every company they recommend, and to date, the results are promising. David and Tom's recommendations are up an average of 57% in a little more than three years. That's 37 percentage points ahead of the market. Click here to learn more.
Tim Hanson owns shares of Whole Foods. Whole Foods and Dell are Stock Advisor recommendations. Merck is an Income Investor recommendation. No Fool is too cool for disclosure ... and Tim's pretty darn cool.