This is the ninth part of a series that is adapted from Michael Sheen’s book “The Investment Checklist”.
We now look at the questions to ask when digging into how management operates the business daily.
This section is also fairly long and will be split into two parts.
Please click on the links below to access the first eight parts of this series.
Part 1 – please click HERE.
Part 2 – please click HERE.
Part 3 – please click HERE.
Part 4 – please click HERE.
Part 5 – please click HERE.
Part 6 – please click HERE.
Part 7 – please click HERE.
Part 8 – please click HERE.
39. Does the CEO manage the business to benefit all stakeholders?
Most CEOs run the business to please the company’s shareholders, but neglect to consider other stakeholders who may also be key to the organisation’s success.
John Mackey, co-founder and CEO of Whole Foods Market, has coined the term “conscious capitalism” to describe businesses that seek to benefit all stakeholders (i.e. customers, shareholders, suppliers and employees).
Conscious capitalism may create longer-lasting shareholder value when all parties are taken care of, and investors should look out for CEOs who practice this.
40. Does the management team improve its operations on a day-to-day or does it use a strategic plan to conduct its business?
Strategic plans are generally more suited for long-term planning and therefore should not be used to guide daily operations.
A company that relies on a strategic plan to make decisions on operational matters will be missing out on incremental improvements.
Operations should take incremental, small steps to improve, rather than rely on an over-arching principle as dictated by a strategic plan.
41. Do the CEO and CFO issue guidance regarding earnings?
Companies that frequently issue “earnings guidance” may inadvertently use such guidance as targets.
The correct method should be for the business to let its operations determine its performance.
If management gets too fixated on guidance, it also encourages a short-term mentality as such guidance is usually issued quarterly (for US-listed companies).
It’s more helpful if no guidance was given, and for management to just focus its energy on running and growing the business.
42. Is the business managed in a centralised or decentralised way?
Centralisation refers to a rigid hierarchical structure where there are clear layers of reporting.
A centralised organisation usually creates a bureaucratic system whereby employees “report” to superiors.
Decentralisation, on the other hand, results in a flat organisational structure where employees do not have strict lines of reporting and are given the freedom to voice dissent or differing opinions.
In the current globalised world, a decentralised structure will motivate employees better as they will not feel stunted by red tape and muzzled by numerous corporate rules and procedures.
43. Does management value its employees?
Companies that value employees will view them as “partners” rather than subordinates.
Remuneration systems in such businesses are geared towards performance and tend to be market-leading.
The organisation also takes pains to ensure that its employees have a well-rounded work-life balance.
As employees contribute to a company’s success and prosperity, investors should look for signs that management treats its employees as key assets.
Employee satisfaction is not a metric that is disclosed in the financial statements but is integral to ensuring that an organisation thrives in the long term.
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Disclaimer: Royston Yang does not own any of the companies mentioned.