This post is the second in a series following Management and Board – Part I. As a reminder, my objective is to highlight a few underappreciated governance features that I have found particularly useful when evaluating management teams and boards—and deciding whether they are truly worthy partners for deploying hard-earned capital. These should be viewed as signals, not definitive conclusions.
The Weightings of Management Incentives
It is common to hear that management compensation should be aligned with shareholder interests. What is discussed less often is the weighting of those performance criteria.
The weightings reveal where management will focus its energy. For example, if a CEO’s financial targets are weighted 75% toward revenue growth and only 25% toward return on equity, the message is clear: growth will likely be prioritized over efficient capital allocation.
Performance-based incentives heavily skewed toward top-line expansion can unintentionally encourage value-destructive behavior—empire building, aggressive M&A, or growth at any cost. The structure matters just as much as the headline alignment.
Source: Custom illustration generated using AI (ChatGPT)
Management-Board interrelationships
While companies disclose related-party transactions, those disclosures alone are often insufficient to determine true independence.
Board members and executives may share long-standing personal or professional relationships that do not formally qualify as related-party transactions, yet still influence judgment. Prior affiliations through employment, shared investments, or overlapping networks can quietly dilute oversight—even when regulatory independence standards are technically satisfied.
Such dynamics can create an environment where a CEO engages in shareholder-unfriendly behavior: obscuring unfavorable developments, allocating capital poorly, or pursuing initiatives that serve management more than owners.
True independence is not merely a regulatory designation—it is a matter of conduct and behavior.
The Peer group Question
A company’s peer group in the proxy statement is meant to benchmark executive compensation, performance, and financial metrics against comparable organizations. It provides justification to shareholders that compensation is competitive and aligned with market standards.
But what happens when the selected peer group is not truly comparable—from a business model, scale, or operational standpoint?
An irrelevant peer set can inflate compensation structures and distort performance expectations. Size, margins, capital intensity, and risk profile all matter. Peer selection is not a neutral exercise—it shapes pay and, indirectly, behavior.
Management's Integrity and Ability
An aligned management team with shareholders (as discussed in Part I) often mitigates integrity concerns—but not always. Issues can arise from incompetence, incentives, pressure, or individual behavior.
Some red flags I have observed:
- A controlling shareholder acting in a self-serving manner at the expense of minority shareholders.
- A CFO repeatedly stating there is no near-term need for capital, followed by an unexpected capital raise.
- Buying back stock at inflated valuations to signal confidence.
- A terrible quarterly result released shortly after issuing healthy guidance.
- Repeatedly blaming macroeconomic factors while competitors perform relatively well.
- Taking on excessive debt to fund high-risk acquisitions or projects.
- Pursuing transactions that appear designed to mask underlying operational weaknesses (slowing organic growth, bloated cost structures, etc.).
The solution is straightforward but demanding: Study the historical record of what management said and then what it did. Compare prior guidance to outcomes. Examine how deals are financed. Actions compound; words evaporate.
Culture and Its Preservation
When a company’s economics are tightly linked to its culture, that culture becomes a strategic asset.
In acquisitions, management often promises cost synergies. But if the target’s value is rooted in people and culture, aggressive cost-cutting may erode the very asset being acquired. Once key employees leave, culture deteriorates—and so can performance.
Synergies on paper are easier than synergies in people.
Accounting Quality
In my view, accounting quality is one of the most underappreciated indicators of management temperament. Does management recognize costs promptly? Build adequate reserves? Avoid income-inflating adjustments and one-time “add-backs”? Or do results consistently rely on aggressive assumptions?
Financial statements reflect philosophy. Conservative accounting signals long-term orientation; aggressive presentation raises a simple question: Do you want to partner with a management team that consistently pushes the boundary in showcasing its financials?
Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).
Abhay can be reached at abhay@asinvpartners.com
Please see the full disclaimer here
