Investor Philip Fisher, who spent a lot of time stressing the importance of good management in his 1958 book Common Stocks and Uncommon Profits, said in a 1996 interview that he didn't stress the issue enough. "It is," he said, "the most important ingredient."

Berkshire Hathaway (NYSE: BRK.A) Chairman Warren Buffett is also very much interested in locating companies with great managers -- not just managers capable of running a company well, but managers whose interests are aligned with shareholders'. To my mind, this means managers and board members need to be thinking about shareholders when deciding how to spend money. Buffett has said allocating capital is the most critical issue managers face.

The problem with measuring the quality of management, of course, is that it's so hard to quantify. There are tools -- such as Buffett's method of looking for at least $1 of market value for every $1 of retained earnings -- but for the most part we learn about good and bad management by watching a company in action.

Does it allocate capital wisely? Are executives well rewarded even as the business struggles? Does management make an effort to guide expectations to reasonable levels, or does it use the pulpit to whip investors into a buying mood, even the face of an industrywide slowdown?

With these questions about management in mind, an item in the Jan. 22 issue of Fortune magazine about WorldCom (Nasdaq: WCOM) CEO Bernard Ebbers caught my eye. Last year, WorldCom's board of directors loaned Ebbers up to $75 million and guaranteed another $100 million in loans so that Ebbers could cover stock he'd bought on margin.

The details are confirmed in WorldCom's latest quarterly report. In September the company loaned Ebbers $50 million, payable on demand, at the same interest rate as a chunk of its outstanding debt; in November the company agreed to guarantee up to $100 million of Ebbers' debt "together with any related interest, attorneys' fees, or costs." At the time of the filing, Ebbers' hadn't tapped the guaranty. And also in November, the company agreed to loan Ebbers an additional $25 million under the same terms as the original $50 million loan. As of Nov. 14, Ebbers had borrowed $11.5 million of the second loan, according to the SEC filing.

The company stepped in and authorized loans so that Ebbers wouldn't have to sell any more stock, further depressing WorldCom's share price, according to the Fortune story. This may be a prudent move for the company considering the alternative, but is this the way WorldCom, a telecom firm in a fast-changing market, should be spending its money? Seventy-five million dollars may be a drop in the bucket compared to the $18.7 billion in long-term debt on its balance sheet, but it's about 30% of the interest expense WorldCom paid in Q3.

And while it's nice that the loan to Ebbers charges interest, it can still be viewed as costing the company money. There is an opportunity cost associated with the way a company spends money, and loaning Ebbers up to $75 million hopefully isn't the highest return investment WorldCom can make. The company has $4.3 billion in debt that must be paid off in the next year and its capital budget -- if it's like most telecom firms' -- is going to increase over time. Besides, coming to the rescue of an employee trading on margin is about the last thing WorldCom needs in the midst of a restructuring.

A WorldCom official declined comment. This may be understandable, but it leaves investors in the dark. It would be nice to know if the company has taken steps to avoid similar action in the future. What should shareholders expect?

WorldCom isn't the only company to extend loans to an employee essentially for stock purchases. Insurance and specialty finance company Conseco (NYSE: CNC) guaranteed bank loans to about 170 key employees, which were used to purchase about 19 million shares of stock, according to the company's 1999 annual report. 

Ann Yerger, director of research at the Council of Institutional Investors, a Washington-based organization that addresses investment issues, said the Council doesn't have a policy on the practice of authorizing such loans since it's a fairly new phenomenon, but that the council has been discussing it. "It's an issue," Yerger said. "It's a very worrisome trend and I hope institutional investors and individual investors will nip it in the bud."

I'm not saying Ebbers hasn't been good for shareholders. On the contrary, the company has provided investors with spectacular returns since Ebbers got started in 1983. Ebbers helped build WorldCom into the country's second-largest long distance phone company and the leading provider of data communications by acquiring more than 50 companies and relentlessly cutting costs. An investor who bought 100 shares of WorldCom in 1990 has seen the value of this investment grow by almost 1,000% -- a 26.5% annual rate -- and that's after a slide to $16 7/16 from almost $50 last summer.

And the fact that WorldCom stock has appreciated significantly under Ebbers clouds the analysis of management's effectiveness. But these are issues worth paying attention to when evaluating a company's management, as well as its relationship to the board of directors. This doesn't look good for WorldCom, its board, or Ebbers. As an investor, it's a warning sign I choose not to ignore.

Richard McCaffery, who doesn't own shares in any of the companies mentioned in this article, lives in Laurel, Maryland with his wife Linda. She doesn't own shares in any of these companies either. Rich's stock holdings can viewed here at Fool.com. The Motley Fool is investors writing for investors.