Finding good companies
Management and corporate governance
5 min
Numbers are produced by people. Behind every income statement is a management team making decisions about how to spend the company's money — and corporate governance is the system of checks that keeps them acting in shareholders' interests. This is the hardest part of analysis to quantify and one of the most important.
Judging management
You are assessing two things: are they good operators, and are they honest and aligned?
- Capital allocation. This is management's most important job: deciding what to do with the cash the business throws off — reinvest, acquire, pay down debt, buy back shares, or pay dividends. A great operator who allocates capital poorly (overpaying for empire-building acquisitions) destroys value. Read several years of decisions and judge the track record.
- Candour. Do they discuss mistakes and risks openly, or only celebrate wins and blame the weather? Read past annual letters: did what they promised three years ago actually happen?
- Alignment. Do insiders own meaningful stock, so they win and lose alongside you? Founder-led companies with significant ownership often show strong alignment. Watch pay packages that reward executives even when shareholders lose.
Corporate governance
Governance is the structure that protects you when management's interests and yours diverge:
- An independent board that can challenge the CEO, rather than a board packed with friends.
- Shareholder rights — one share, one vote, versus dual-class structures that let founders keep control with little economic stake.
- Clean accounting and related-party dealings. Frequent restatements, auditor changes, or business done with the CEO's own companies are serious red flags.
- Sensible incentives tied to long-term value, not short-term share-price pops.
How to use it
Good governance rarely makes you money on its own, but bad governance can lose you everything — the largest blow-ups in market history are usually governance failures, not operating ones. Treat trust as a gate: if you do not trust the people and the structure, no amount of cheap-looking numbers should tempt you in.
This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.