How to Tell When a Company is Mismanaged

Analysts grind through financial data, other people look at stock price, other people look at trends.  How do you know when a company is being mismanaged?

Here are some of my signs:

1.  They consistently engage in stock buybacks.  It’s not their money.  It’s the investors money.  The investor is putting up risk capital and expecting a return on investment.  Part of the return is dividends.  All buybacks do is reward management by cashing them out of their options.  The only time a buyback is useful is during a merger, or an acquisition.  It helps set a price when the market is constantly moving.  It also shows commitment to the deal.  Internal buybacks initiated by management are NOT commitment to a company.  If they can’t figure out how to expand the company using the capital that they generate, give it back to their shareholders.  Buybacks do a disservice and disrespect the long term investor in the firm.  When a CEO says, “I think our stock is undervalued compared to the market price.”  they shouldn’t buy back shares.  They should buy them with their own cash and then go out and build their business and prove the market wrong.

2.  They continually miss opportunity by saying we aren’t in that business, or by a failure to miss the big picture and to re-align their business.  The classic example is Xerox and the GUI interface.  Xerox developed the user friendly interface that Apple and Microsoft used to start companies and redefine what computers were.  They also developed email! Xerox execs failed to see that they were in a technology business.

3.  They overspend on projects for marginal short term gains.  Manage with a short time horizon. Sometimes they even manage earnings.

4.  Their CEO always speaks from prepared statements, and sounds like a lawyer when they are speaking rather than a businessperson.  They have difficulty interacting in real time.

5.  The CEO and upper management always have an excuse for things not working out.  Or, they blame lower staff and the blame flows downhill.  The other possibility is they continually blame outside forces.  ”It was beyond our control.”, they say.  Or, “We don’t control our stock price.”  Yet, a good CEO can add billions to the valuation of a publicly traded company.  A bad CEO can detract from it.

6.  Not confronting bad news head on quickly.  When something adverse happens in the stock market, or in the company’s business, waiting and sitting behind the scenes.  This lets competitors fill the vacuum with talking points.  Even in companies that wouldn’t get public scrutiny, your customers will hear from your competitors.  Most CEO’s avoid confrontation of bad news publicly for fear of lawsuits, or fear of blame.

7.  Reliance on how things always were.  Each business needs to be continually evaluated objectively.  Keep what’s working, toss out what’s not and admit when mistakes are being made and move on.  Honesty with shareholders is a lot better then sleight of hand.  Every magician is eventually found out.

8.  The CEO is heavily insulated, either by layers of bureaucracy or a large board of directors.

9.  Board of Directors is stagnant and never changes.  Sign that the company is the same.

10.  They fail to integrate mergers and acquisitions, or their M+A activity is faddish.  Time Warner/AOL comes to mind.

What are your signs a companies management is out of touch, or moving a business in the wrong direction?

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