The importance of management in the small, publicly trading company

So much goes into the companies that we deal with. On the surface, there are the companies’ technicals: trading price, volume, moving averages, etc. A little further down, there are its fundamentals: revenues, net income, assets, liabilities, etc. Even further down, there’s management: CEOs, CFOs, COOs. You name it, there’s an executive officer for it. However, in small companies, management teams often consist of only a few officers, but their decisions have the capacity to make or break the companies they manage.

To begin with, the differences between managing a small company and managing a large company are quite striking. First, there’s the issue of pay. Managers of small companies certainly will not receive the same compensation as managers of large companies. Quite simply, their firms don’t have the financial ability to pay multi-million dollar salaries and enormous bonuses.

Second, there’s the intimacy factor. An executive of a small company can walk down the hallway to discuss a change with employees. He or she can also create more personal relationships with shareholders. The bottom line is small company management teams are closer. There are benefits to this (efficiency and accessibility), as well as pitfalls (being held under the microscope).

Third, managers of small companies have fewer or limited resources. Speaking from an assets standpoint, microcap executives have a smaller pool to draw from. So, execution of certain plans is tricky and warrants creativity.

The job of a small company executive is no walk in the park. However, there are certain attributes that separate the successful managers from those who aren’t so successful. These characteristics are from an investor’s standpoint. So, they are what we look for in a company’s management team.

The first attribute is accessibility. The ability to speak with management is a benefit of investing in a small company. Management that lends itself to interviews, questions, explanations is on the right track. Speaking with a chief executive officer, president or other top level executive reveals a lot about where a company is headed. Between the lines, experienced investors can sense passion, confidence and excitement, as well as doubt, confusion and hubrous. Speaking with management is a great way to have questions answered, but it is also a great way to gauge its true feelings. This lends itself to the old addage: “it’s not what you say, it’s how you say it.”

The second attribute is confidence. Confidence can come through during a phone call or at a meeting, but the biggest display of confidence is taking a position in the company. If management believes in what it’s doing, why would it not back its confidence with a meaningful position in the company? As we have discussed on many occasions, there are a lot of factors that play into insider ownership. However, under any circumstance, management should have a considerable position in the company. Otherwise, why would you own something management does not even want?

The third attribute is effectiveness. This characteristic is tough to pin point. Basically, management needs to be able to demonstrate that it is able to create and implement a plan to move the company forward. There are two parts to evaluating a management’s effectiveness:

  • Planning: What is the plan moving forward? Does it pass the smell test? Meaning is the company within its capacities. For example, a company with $1 million in revenues likely won’t grow to $100 million in a year. So, what are the company’s benchmarks and do they seem realistic given the company’s current standing?
  • Execution: After being aware of the benchmarks, did the company achieve any or all of them? This is key because it truly shows a management team’s ability to fulfill its goals. If some or all of the goals are met, investor confidence will grow, leading to higher share value.

The importance of effectiveness goes without saying. Simply put, an ineffective management team will lead to a declining share value and vice versa.

The fourth and final attribute is experience. Not all microcap executives have executive experience leading a company. But are they experts in their fields? Have they had success in the past? There is a reason this is last and that’s because past experience and success do not always lead to future success; and, the lack of past experience and success does not always lead to future failures. However, having know-how helps.

There’s an old saying in the investment world: bet on the jockey, not the horse. This means that investors bet on the management team, not necessarily the company. In most cases, the smaller the company, the truer this saying rings. Stock market and financial success speak for a company. However, behind those successes is a management that is accessible, confident, effective and experienced. In the fragile, volatile world of small stock investing, it’s critical to have management on the investors’ side. After all, management decisions can make or break a small company.