Bad Management Danger Signs
Bad management is everywhere and investors need to be on the lookout. Here are signs that should send shivers down shareholder spines. Plus, a suprising sector that offers good management and value.
Such bad managers represent a big problem not only to buyers of shares, but also to their employees and their communities.
I've seen it first-hand, and it's not a pretty tale.
Starting in the late 1990s, I worked as a compensation specialist in the auto industry for a publicly-traded company.
Within a few years, the firm was forced to file for Chapter 11 bankruptcy protection. Shares now trade on the pink sheets at around 0.6% of their original value.
What happened?
A big part of the problem was an entrenched executive team that couldn't seem to see its way clear to look after shareholders.
Consider the following example: I had devised a bonus plan for a group of sales professionals dedicated to selling parts. The plan was heavily weighted toward commissions, and could theoretically have resulted in huge payouts for the salespeople.
The divisional head opposed the idea, however.
The plan I had developed, he said, was no good because it was theoretically possible for one of his salespeople could earn more than he did.
But there's the problem: Why should that worry him?
If any of his people earned more than he did, it would be only because they had sold loads of products, presumably at huge margins. Such profits would have ultimately resulted in a nice bonus payout for him, also.
But that division head couldn't get past the idea that someone on his team might earn more than he did.
"There are times when the selfish thing to do isn't the right thing to do," says Michael Darda, chief economist at MKM Partners in Greenwich Conn. "Companies that do that sort of thing are unlikely to stay at the top."
The attitude of the executive in question was pervasive throughout the firm, with the general stance being: We care more about internal considerations, such as hierarchy of pay, than we do about making the right decision for the firm.
Perhaps it shouldn't be any surprise that the stockholders fled
en masse
.
David Ranson, director of research at Wainwright Economics, says: "Managers who simply hold onto the status quo and miss opportunities to do something good for the shareholders are simply encouraging further flight of capital."
The rest of the auto industry in the upper Midwest seems to have missed the boat for shareholders also. Shares of both
General Motors
(GM) - Get Report
and
Ford Motor
(F) - Get Report
, the two big Michigan-based car makers, have declined over the past five years.
A large chunk of the woes in the auto industry are due to factors such as globalization, but nimbler and more open-minded management might have helped the companies deal better with the challenges in the industry.
One result is that employment in the auto sector has sunk steeply, as measured by membership in the United Auto Workers.
Another company where resistance to putting shareholders first has led to big problems was
Dow Jones
, now part of
News Corp
(NWS) - Get Report
.
DJ's stock had been fairly high when the paper was full of tech-bubble-supported ads, but had declined to the mid-$30s prior to the ultimately successful $60-a-share News Corp. bid in May last year.
Again, entrenched management seemed to care little for shareholders, and the controlling shareholders -- the Bancroft family -- lacked the energy or the motivation to make changes. Management seemed to insist on inefficient practices like mass duplication of effort across its product line (The Wall Street Journal and Dow Jones Newswires, for instance, producing similar content with little coordination).
And then there was the company's acquisition of Telerate, a service similar to that of
Bloomberg
, at a time when Dow Jones had all the advantages to dominate the space.
Of course, Bloomberg won that race handily in the end.
Now that the organization has a new parent, Dow Jones seems to want to move on.
"Irrespective of what transpired in the past, the priority at Dow Jones now is to grow the business and return value to News Corporation and its shareholders," a company spokesman says.
Dow Jones shareholders did end up being lucky - instead of languishing with a depressed stock price for years, they could sell to News Corp. at an extremely rare premium to the pre-bid stock price.
Most investors don't get that luxury with their lagging stocks.
The good news for investors and employees is that there are firms and industries where focus on shareholders still does exist.
For one, there's the brutal of the world of finance.
To take just one example,
Goldman Sachs
(GS) - Get Report
has seen its stock almost triple over the last five years, even taking into account the recent dip for the credit crunch and subprime mess.
Goldman is exceptional in some ways, but in others it is reflective of the general health of an industry dedicated to making money and providing returns to their owners, the shareholders.
In Wall Street's glass and marble towers, there is little place for operations that don't consistently make money. Units that don't produce are pruned, and workers are fired until profits flow once again.
It's a daily knock-down, drag-out fight in the industry. Workers get hired and fired all the time.
But that has actually been very healthy for both shareholders
and
employment in the industry.
As the market continues to bounce up and down, investors looking for a sense of where to put their money would do well to look at the attitude of the companies' management teams and for these danger signs.