One of the most important factors that the Inside Value team considers before recommending shares in a company is quality of management. After all, incompetent management can reduce the performance of even the best business, and dishonest management can ensure that shareholders don't receive the benefits of corporate success. You just have to look as far as Conrad Black's alleged use of Hollinger
But determining management attitudes and ability is particularly tough for small investors. After all, you're unlikely to get the chance to spend time speaking with management one-on-one in order to assess them directly. So, one of the best ways to evaluate management is by examining the decisions that management makes, and determining whether they are both sensible and shareholder-friendly. For instance, consider Inside Value pick First Data's
First, First Data acquired Vigo Remittance, an electronic money transferral service focusing on Latin America. This looks like a good purchase, considering that First Data owns Western Union, the largest money transferral service. With this acquisition, First Data takes out a competitor. It also acquires a business in an area that it really understands -- one that should integrate easily into the rest of its operations. It seems like a smart management decision: a low-risk bet that increases First Data's competitive advantage.
Second, First Data announced the results of shareholder votes at the annual general meeting. In one of the votes, management increased the number of potential shares for the employee stock purchase plan by 6 million, the first increase since 2002. This seems like a reasonable number, considering that First Data has 778 million shares outstanding. Shareholders will be diluted less than 1%, probably over several years, with employees likely purchasing most of the shares at close to market value.
Third, shareholders voted for a "Senior Management Incentive Plan." Often, these plans are outrageous and would be more accurately named the "Senior Management Plan to Steal from Shareholders." But this plan is reasonable. The CEO can make up to $3 million and other senior executives can receive up to $1.5 million, quite acceptable numbers for a company with earnings of more than $1.5 billion. Furthermore, the awarding of these bonuses is based on the achievement of performance goals set at beginning of every year. This is a big improvement over companies where bonuses are arbitrary, or even worse, companies like Qwest Communications
Overall, last week's events support Inside Value's assessment that First Data has strong management with high integrity. It seems clear that management is acting in shareholders' best interests, not just running the company for themselves.
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