How to Evaluate Company Management Before Investing

Management quality is the most difficult factor to evaluate in investing, yet it may be the most important. A great business with terrible management will underperform, while a mediocre business with brilliant management can become extraordinary. Warren Buffett has spent decades refining his approach to assessing the people who run the businesses he invests in.

Buffett looks for three qualities in management above all else: integrity, intelligence, and energy. He famously warns: "If you don't have the first, the other two will kill you." A manager who is smart and energetic but lacks integrity will use those talents to deceive shareholders and enrich themselves at the company's expense. This is why Buffett starts every management evaluation with character, not competence.

The most reliable indicator of management quality, according to Buffett, is capital allocation skill -- how the CEO deploys the company's earnings. Great managers invest earnings at high rates of return, buy back stock when it is undervalued, make disciplined acquisitions that create value, and return excess capital to shareholders through dividends. Poor managers empire-build through overpriced acquisitions, maintain excessive cash hoards, or invest in low-return projects to grow their personal empire.

Charlie Munger evaluates management through a longer lens: track record over at least a decade. He is skeptical of charismatic new CEOs who make bold promises without proven results. Munger prefers managers who have compounded shareholder value steadily over many years through operational excellence rather than financial engineering. His favorite management teams are "boring" -- they don't make headlines, they just quietly deliver results year after year.

Philip Fisher pioneered the "scuttlebutt" method of management evaluation: talking to customers, suppliers, former employees, and competitors to learn what they really think about a company's management. Fisher argued that public information (earnings calls, annual reports) presents a curated image, while the real picture emerges from people who deal with the company directly.

## Your 5-Step Action Plan

**Step 1: Read Five Years of Annual Letters.** Management's annual letters to shareholders reveal more about character and competence than any analyst report. Look for: honesty about mistakes, clear communication about strategy, realistic assessment of challenges, and consistent messaging year to year. Red flags: letters that never mention problems, blame external factors for failures, or change strategy annually.

**Step 2: Evaluate Capital Allocation Track Record.** Look at how the CEO has deployed capital over 5-10 years. Calculate the return on acquisitions (did they create or destroy value?), assess share buyback timing (were shares repurchased when undervalued or at all-time highs?), and examine dividend policy. CEOs who consistently create value through capital allocation are rare and valuable.

**Step 3: Check Insider Ownership.** Do executives own significant stock in their own company? Skin in the game aligns management interests with shareholders. Ideal: CEO owns 5%+ of company equity or has a substantial personal investment relative to their net worth. Red flag: executives who consistently sell shares despite the company telling investors to buy.

**Step 4: Analyze Executive Compensation.** Is compensation aligned with long-term shareholder value or short-term metrics? Red flags: excessive total compensation, large bonuses despite declining stock price, golden parachutes, and compensation tied to revenue growth rather than per-share earnings growth. Best practice: compensation tied to long-term ROIC and per-share value creation.

**Step 5: Listen to Employee Reviews.** Check Glassdoor, Blind, and similar platforms for employee sentiment. Companies with high employee satisfaction tend to have better management, lower turnover, and stronger cultures. Persistent complaints about leadership, direction, or culture are warning signs that often precede financial deterioration.

### The Bottom Line

Management evaluation is part science and part art. The science comes from analyzing capital allocation records, compensation structures, and ownership levels. The art comes from reading annual letters, observing communication patterns, and developing judgment about character over time. As Buffett says, "In looking for people to hire, look for three qualities: integrity, intelligence, and energy. And if they don't have the first one, don't even bother with the other two."