Evaluating Management - The CEO

In terms of management responsibility the CEO in most companies is the top of the chain of commands. So analyzing the details of how the CEO conducts himself can unravel some important hindsight into the details of the company management and strategy.

Read the CEO’s annual letter to stockholders in the annual report (or 10-K). Get a feel for what the CEO thinks in terms of the direction of the company and check his tone. Make sure that the “Management Discussion and Analysis” section is carefully read. Here a lot of the details of the balance sheet and income statement are elaborated.

In terms of the overall result of the report what is the CEO’s account for recent performance? What does he say or respond to if the company hasn’t done well. What went wrong? What went right? How can the company improve and learn from mistakes or enforce previous successes? Does he take ownership of responsibility or does she just brush them off with excuses. Does the CEO discuss how much money the company has made and does he mask problems by using different measures of profit? Check to see if the CEO switches between net income to EBITDA and operating profit. Analyze previous statements to see if past predictions produce actual performance. Are enthusiastic initiatives put to practice in forthcoming years?

Listen to conference calls on the highs and lows of the past 90 days. Beware of defensive and aggressive behavior. It is also useful to see how successful the CEO was in his previous job. Check to see if the CEO is also the chairman of the board of directors. This is a big conflict of interest as the board of directors have the role of hiring the CEO and if the CEO is in control of them they would most often be reluctant to speak against him. Just a side note, if the CEO or other top executives own actual shares rather than simply own stock options, this could be a good indicator that management’s interests are in line with the companies.