Good Management

My next few articles will probably deal with the level of corporate governance at some of the companies I invest in. This is a good time for that type of article as I have a stack of annual reports and proxy statements to look over. One of my criteria for buying stock is good management. As Peter Lynch wrote, he'd rather buy a mediocre company with great management than a great company with mediocre management.

The way I interpret good management (or good corporate governance) is:

• Executive management with large holdings of stock.
• Along the lines with the one above, stock ownership guidelines for management that requires a minimum amount of stock to be held, such as 3 times base salary (and whether they can count the options and restricted stock awarded to them).
• Management length of employment, and involvement by the founder(s)
• Board of directors that don't overpay themselves.
• Salaries and/or bonuses that are sane and don't increase dramatically, especially after a year when the stock price suffered.
• Separation of Chairman and CEO
• Paying of a dividend and increasing it regularly
• Using corporate cash wisely

There's probably nothing too dramatic and surprising on this list. It's just trying to make sure management goals are aligned with the stockholder, and that they are rewarding the stockholder.

I'd like to point out not all the companies I'm invested in pay a dividend. Nevertheless, it's just one more way for management to demonstrate its commitment to rewarding shareholders.

Determining if a company is using cash wisely is a more abstract concept, and is harder to quantify. I like the Peter Lynch measure - what type of corporate headquarters does the company have? Is it a huge, expensive and elaborate campus like Medtronic? Or a more humble structure like Graco? I think this speaks towards the priorities of management.