How to Evaluate Management

Even in this, the age of Regulation Fair Disclosure ("Reg FD") -- the SEC mandate requiring companies to disclose important information simultaneously to all investors -- there is still at least one significant advantage professional money managers have over individual investors: access to management.

And while that access may not necessarily provide the pros with privileged information (which would be against the law), the simple fact that they often invest millions of dollars at a time means they can expect to be able to reach top managers with greater ease, or at least sit them down after presentations to "feel them out" and get a sense for their personality, intellect, demeanor, and understanding of pertinent issues.

Though perhaps not quantifiable, all those qualities should be important to investors considering companies in which to become part owners. We certainly take it seriously here at The Motley Fool where, for example, it is considered paramount to the managers of both of our best-known portfolios: The Rule Maker team looks for "great management of unquestionable integrity and with a track record of excellence," while Rule Breakers require "good management and smart backing."

Sounds great. But what does all that really mean? And how can you do this at home?

Unfortunately, there is no simple formula for evaluating a company's management: Even short-term share price performance -- the idea that "If the stock is going up, management MUST be doing a good job" -- falls well short, as anyone who once revered and now curses the likes of Amazon.com's(Nasdaq: AMZN) Jeff Bezos or Cisco's(Nasdaq: CSCO) John Chambers can attest.

At the same time, this matter is unquestionably crucial, even to investors who don't follow either of the aforementioned investment approaches (which are showcased on our website and also monthly with stock ideas in The Motley Fool Select). Long-term investors must be willing to ride out the occasional mystifying event, controversial decision or strategy, and share price meltdown -- or explosion -- if they hope to realize market-beating, tax-efficient returns from stocks, and a strong compact with a company's top executives is one tool that can help doing so less painful.

In the end, as with seemingly all decisions in investing, the final determination of management's capabilities and reliability will generally incorporate as many subjective decisions as objective ones.

Luckily, evaluating management is not complete alchemy. In this special feature, I'll discuss useful ways to evaluate a company's managers -- both hard-and-fast, and less so -- in an attempt to help you get your arms around this often-tricky proposition and make better-informed investment decisions.

Next: Executive Background »