The most important part of a company is the board of directors. These are appointed by shareholders in order to look after shareholders’ investments. Ultimately, the board works for shareholders. And the board can have a very big influence on the company’s prospects, so when investing it’s important that you assess the company’s directors.
Check their history
It’s important to look at a director’s track record in business and see whether they have been successful. If every company they have been at has seen an alarming decline in the share price – we need to know why before we invest.
It could be that the company just wasn’t able to succeed – but it could also be a result of incompetence. We don’t want to be investing in companies that aren’t able to succeed, and we definitely don’t want to be investing in companies with directors with a history of incompetence!
Check the board’s diversity
It is well-known that being on a board of directors is very much like an old boys’ network – where friends help each other out in gaining positions of influence.
This can lead to some very non-diverse boards. Imagine a tech company that has its main product geared to both male and female teenagers – would we want a board made up of only men over the age of 70?
Not only do we need to check the ages and genders of the board members, but also their skillset.
Many businesses are now at risk of cyber attack, yet many boards have not managed to mitigate that risk effectively. This is because they don’t understand the risks and therefore can’t come up with an effective solution. Having various skillsets on the board, such as leadership, sales, and cyber knowledge, helps to build a more diverse and more successful board.
Check the board’s salary and shareholdings
Finally, we can check the board’s salary and their shareholdings. If the board are paying themselves exorbitant salaries that are increasing every year (we can check this in the annual report), then who are they working for? Are they working for shareholders or are they working for themselves?
We should avoid companies where directors are using the company as a vehicle to finance their own lifestyles. Checking their shareholdings (and where those shareholdings came from) is a big clue into the mindset of the director.
There is a big difference between £100,000 worth of options and £50,000 of shares paid for by a director’s own money.
Ultimately, we want to be investing in companies where the directors are entrepreneurial and stand to lose money if things go wrong, rather than directors who check in and cheque out.
Reviewing the quality of the directors on the board will help you avoid bad investments.
Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.