Evaluating Company Management

Transparency

1. Does the company over use one time charges and write offs? In public announcements, does it consistently disregard GAAP numbers and point to pro forma numbers?

2. Does the firm use aggressive accounting? Has there been a major change in accounting practices in the last three years?

3. Has the company recently restated earnings for any reason other the compliance with an accounting rule change? Has the company had an unexplained delay in making regulatory filings or reporting quarterly results?

4. Does the company grant options without expensing them?

5. Does the company choose not to provide any balance sheet with its quarterly earnings release?

6. Does the company's disclosure go above and beyond what its competitors provide?

Shareholder Friendliness

7. Does the company have a seperate class of voting shares that an insider controls?

8. Does the company have take over defenses in place, that if activated would seriously dilute existing shareholders or favor the interests of management over shareholders in a takeover situation?

9. Has a majority of votes of shareholders on a proposal be thwarted because of: management inaction; management interference in the ballot process; the existence of a super majority provision?

10. Is the chairman of the board and the CEO the same person?

11. Has the board or managemen acted in significant related party transactions that cast doubt on its ability to act in shareholders' best interests?

12. Is there cummulative voting? ( are shareholders' votes equal to shares owned times the number of directors)

Incentives and Ownership

13. Has the board agreed to a compesation plan that rewards management for being employed rather than for making value enhancing decisions?

14. Over the past three years, has the firm given away more than 3% of shares annually as options?

15. In bad times, has the board awarded perks?

16. Is the CEO's equity stake,including options, too small to align his interest with shareholders?

17. Do members of the board of directors receive a large portion of their compensation in cash rather than stock?

18. Do the goals set out for top management by the board of directors compensation committee encourage short term actions rather than long term value creation? Is the disclosure of the board of these goals insufficient, too generic, or too fuzzy to answer the preceding question?

19. Given the company's financial performance, the board's and management's past actions, and the above factors, is management inappropriately motivated and/ or rewarded?

20. Does the board and management have a substantial track record of doing right by shareholders?

Be aware of question 11. This question is about third party transactions. Third party transaction can harm shareholders the most.

The Financial Reality

Although competitive positioning extremely important to a company's long term fortunes, quality management matters too. If the best ship can be run offshore by an incompetent skipper or pillaged by pirates. The whole reasoning is asking these questions is to find out if you are investing with people that you can trust.

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