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.

Company Visits
Formal tours are rarely possible, especially for individual investors. But a quick, unscheduled visit to one of the company's offices can offer a glimpse of the general behavior and attitude of the executives and employees. Is the telephone answered quickly and courteously? Is the receptionist on the ball? Are employees enthusiastic about the company and its prospects? In other words, is there a sense of team spirit?

Presentations and Conference Calls
In practice most companies allow Wall Street analysts to pose questions first. Increasingly, journalists are also invited to ask questions. Most companies draw the line at letting individual investors ask questions, unless they hold big positions in the company. Mom-and-Pop investors are usually out of luck; they are almost always denied an opportunity to grill the CEO.

Still, it is a good idea to see how well the CEO and top management field the questions of analysts and journalists. How well do the managers answer questions concerning company disappointments? Does management have a decisive plan to remedy the disappointments? Does the management team have answers at the tip of their tongue for every question, or do they fumble through papers and struggle to provide answers to even simple questions? Do the CEO and CFO pass questions to one another seamlessly, or are both unsure of answers? Bear in mind, that, even at analyst presentations, management often prepares a few questions and arranges to have them raised.

Published Reports
Do not be distracted by lavish annual reports filled with color photographs of the CEO and top executives. These glossy documents provide no bearing of the company or management's quality. It is important, however, to read the chairman's statement and compare the cited achievements against those expected in the previous year's report. Of course, the auditor's report should be checked to ensure that there is no qualification of any kind. Always read the notes, as this is frequently where important points are tucked away.

Meeting Forecasts
Management that fails to meet formal performance targets or earnings forecasts could be on its way out. Investor backing will be harder to secure next time it is needed, so additional access to capital might be jeopardized. Failing to meet analysts' forecasts can be dangerous; highly-paid analysts will necessarily want someone to blame.

Conclusion
Because past share performance does not necessarily guarantee quality management, it is important to take a closer look at who is heading the company. Good leadership is essential for any business, so keep an eye on qualitative measures like those mentioned above to get a sense of a company and the management that runs it.

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