Evaluating Management - The Board of Directors

The board of directors are responsible for enhancing value to the company. It is important therefore to check how many of the directors are also employees of the company. This could be a conflict of interest in terms of employees having the incentives to maximize their own efficiencies. If available check also to see how many of the directors are related to each other. Another potential problem could be interlocking of directors. If the chairman of let’s take for example Apple Motor’s is also one of the directors of Henry’s Auto Parts (a supplier of Apple Motor) and vice versa, potential conflicts arise. This is because suppliers are chosen based on outside interests rather than minimizing costs and efficiency.

Other potential conflict of interest issues can come up in related part transactions. If management owns shares in companies which are suppliers to the company they are managing then there is room to argue that suppliers are chosen because of their own interest rather than what is best for the company. This has been a major problem in the East Asian relationship based business structures like the keiretzus and chaebols which had a strong emphasis on cross shareholdings. Check to see how independent the “independent auditors” really are. Coming from one of the top 5 accountancy firms doesn’t guarantee this. Check to see if the auditors have a long history of also being consultants. If that is the case the auditors can potentially be hesitant to questions the company’s finances for fear of weakening the relationship. Another useful concept to measure is the company’s morale. This is off course is a lot harder because there is no easy way to gauge this from the annual report. There are indirect ways of measuring this however. One should analyze how many layoffs the company has made recently. This could worry employees and instead of them focusing on the job they might be more involved in their personal anxiety of who the “next person” will be. One can check morale by searching through bulleting boards and reading comments. Vault.com has a specific section with chat boards.

Does the company have any powerful unions? Hyundai Motor for example had a huge strike in 1998 after 3000 workers protested rising layoffs. If unions have a powerful bargaining position with the company then management cannot structure employees to maximize efficiency.