Management analysis of stock- The ultimate Checklist

Management analysis in stock analysis involves assessing a company's leadership, strategy, and decision-making to gauge its competence, transparency, and alignment with shareholders' interests, helping investors evaluate potential risks and returns. This checklist would help investors to screen stocks by their management, making analysis much more efficient

Management analysis is the analysis of management- including CEOs, CFOs, directors, chairman’s, and all the upper management who are running the company and taking important decisions for the company.

There is one famous quote by famous management consultant Mr. Peter Drucker- "The best way to predict your future is to create it." And this future for an company can be predicted if their management are well visioned and has both passion and experience to run the company indefinitely.

The problem comes when motives of management are self centred and not on the company as whole, then the company would doom to fail. We can see these examples from many companies where promotors are focused to fill their pockets first rather than focusing on growth of company, 

One of them is Zee entertainment, where promotors siphoned loan money from companies to shell companies, and ultimately to their own pockets, another is Brightcom group, who falsified their financial documents to hide their expenses and to make company look attractive, to increase its valuations.

There are several companies who are doing same but are not in limelight, for an fundamental analyst, management analysis of companies should be must. Here are six criteria's from which an fundamental analyst could judge the management of the company-

Criteria 1: Management should not involve in any fraud

Management should never be involved in any fraudulent activities. Fraudulent actions can lead to severe legal, financial, and reputational consequences for both the individuals involved and the organization as a whole.

Fraud done by an individual in company would taint the image of organisation as whole for years.

One of the example is Satyam computers, Satyam's founder and then-chairman, B. Ramalinga Raju, admitted to a massive financial fraud that had been ongoing for several years. This revelation sent shockwaves through India's corporate and financial sectors, people who invested in company found themselves cheated and had much financial losses due to fraud.

Individuals should do proper management check and see if company’s upper personnel had been in fraud in different companies or have any outside criminal cases pending against them.

Criteria 2: Management should not in politics

This topic could be controversial, but management personnel who is in both upper management and politics tend to favour company by using their political measures, also most of the time, management join politics by hiding some mis happenings in the company.

Also involvement of upper management in politics also raises question about their focus shift, one could not expect much efficiency with business due to involvement in both of the positions.

It is general tendency that a higher ranked management person tend to be in politics to have indirect favours to his/her company, else why could someone join politics in first place?

One example could be of Navin Jindal, chairman of JSPL. He became M.P. from congress twice and there are allegations that he used his power for coal allocation for his business, later this was proved and there are cases running against him, after this, the company’s share tanked from levels of Rs. 600 in 2009 to levels of Rs. 55 in 2016, by this incident, the shareholders lost 90% of the wealth in years and company has not seen growth till now

Criteria 3: Management should not have pledged shares

Many times management pledge their shares to banks and other financial companies for loans. Shares act as collateral for this loans. However these loans face risks of liquidations due to volatility of stocks.

Generally, companies should not pledge their shares for receiving loans as it faces risk of dilution of ownership at adverse times. It is advisable for investors to avoid companies with pledged shares. However, the company’s pledge should not exceed 20% of total Shareholding.

If company’s founder had pledged high amount of shares, this means that either company is cash-ridden or company is not performing much efficiently.

Pledging of shares also results in an virtues trap of promotors. If shares price drops suddenly, they have to pledge much shares to lender, and it goes on.

One example of this situation could be IL&FS, an leading infrastructure company of India, in 2018 it faced severe financial crisis when their debts become too much to handle and much of their loans were taken on pledge by their key shareholders, which resulted in fault in debt repayment and soon company went to bankruptcy.

If we take another example, but not failed is Vedanta Limited, where shareholders own 68% of shareholding but all of them are pledged, and had taken large loans from it, If there are sharp fall in share prices of Vedanta, lenders have no choice but to sell it in open market, this means much higher fall for share. Promotors could not prevent this situation as they would not have any more shares to pledge or increase their margin health, leading to mass selloffs.

Criteria 4: Management should not take high salaries from profits

According to company act 2013, the level of managerial remuneration is set to 11% of the net profits of the company. However if company is very small, is in the growing stage or booking losses, then it is set to 5% or nil.

However, there are many companies who did not follow the rules and management pockets most of the company’s profits, now it has two consequences- one is the intention of management about their salary first intention and second is lower growth of the company, as most of their profits go as salary.

These details are available on company’s annual reports under remuneration section where one can find details of all the management’s salary or remuneration

For this, let’s take example of Zomato Ltd, Which is not become profitable till now and has booked losses of 1015 Crores in FY 2022-23. However despite their losses, the management had taken fixed salaries of 20 Crores.

Criteria 5: Management should be experienced and with diverse backgrounds

Many times, in board of directors, there are presence of several members who are not much experienced or are in position due to family business.

In monopoly businesses such as IRFC, IRCTC, or in other PSU companies, there are not much experienced CEOs due to nature of the business, it would not depend upon the management due to their monopoly.

There are many companies who have majority of board members as their own family members, however it poses a threat of misalignment of views between the decisions, which leads to poor decision making and lack of growth in the company. In several times, this can lead to split of companies. This was seen in reliance after the death of Mr. Dhirubhai Ambani, where his two sons, Mukesh and Anil had conflict of views and that led to split of companies after the arbitration by their mother.

Companies who have majority of promotors as family members should be carefully monitored, not all but some companies could affect by the difference of opinions.

If we see reliance today, The board consist of very much experienced members such as KV Kamath, Arundhati Bhattacharya etc which are well experienced, and board consist of only two family members only- Mukesh and Nita Ambani, and rest are all from different backgrounds.

Board of reliance Industries

Criteria 6: Management should achieve their said targets

During the Annual General Meeting or conference calls, the directors or upper management give forecasts about the company’s growth and what would company achieve in upcoming year. However, companies achieve the promises but some didn’t.

If someone is planning to invest for long term, they should look upon the previous conference calls and compare their expected forecasts with real data after the said period. If they are not achIeving it, then it is an red flag.

The forecasts made should be realistic and achievable by the company. For example if management of an company expects profits to jump 300 percent after a bad result, this could be a red flag due to fact that they are just assuring their shareholders that everything is okay and would be and to stop their share prices to fall.

During screening of stock, the above checklist would remove almost 70% of the companies, making you left with much less stocks to screen. If you want to invest for long term, first use this checklist and then go with fundamental analysis by looking on the financials. This would help you a lot for screening of stocks

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