Course 207: Weighing Management Quality
Management Structure
In this course
1 Introduction
2 Why Management Matters
3 Management Structure
4 Buying a Business
5 20 Questions
6 The Bottom Line

Technically, the management team of a public company works for and reports to the board of directors, who represent the company's owners: its shareholders. In the U.S., companies typically hold annual elections at which shareholders vote (or assign their vote to someone else, called a proxy) to elect directors to the board. In theory, then, shareholders can wield great influence over the management and direction of the companies whose shares they own. In practice, as corporate and investing cultures have evolved, the relationship between shareholders and company managers has become ritualized and more distant.

So how should investors close the gap? We believe that by identifying and investing in companies that have demonstrated their commitment to treat shareholders well, individual investors can reassert their influence on the day-to-day choices and priorities that companies set.

What do we mean by "demonstrated commitment to shareholders?" Perhaps an analogy will help. Imagine you have decided to start a lemonade stand with your neighbor. When you meet at the appointed time to go over your plans, your neighbor brings a pound of sugar for the lemonade. Such a gesture demonstrates your neighbor's commitment to doing business with you.

Similarly, when you view a home for sale, you expect it to be orderly, and that the owner will make arrangements for you to see it. In this small way, the seller has demonstrated his or her commitment to doing the things that are necessary to sell you the home. If it's a hassle to view the home, or it's disorderly when you view it, that should prompt questions about how the later stages of negotiation and closing will be handled.

Next: Buying a Business >>

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