As an alternative tool to investigate a company’s prospect, besides B/S (Balance Sheet) and P/L (Profit/Loss Statement), Peter Lynch told us to sniff around its management culture. Solid and visionary management is an early sign of good stock performance, otherwise it indicates early sign of decline and you should abandon its stock. Remember Enron, even a giant global energy company could go bankrupt. 

These are some early warning signs of poor company you must avoid:

1. Excess personnel and excess department
2. Tolerance of incompetence, there is no punishment for doing wrong or reward for doing perfect
3. Cumbersome bureaucratic procedures, the management prefer procedures to results
4. Scarcity of clear goals and decision making
5. Outdated organizational structure
6. Lack of leadership, the company has as many managers as possible, but there is no leader.
7. Resistance to change or slow response to change
8. Low morale
9. Decreased innovation, the company introduces only few new products to market for every couple years
10. Lack of strategic actions, the company appreciates routine jobs more than strategic ones. Even this could be worst: there are no personnel or manager who thinks strategically.
11. The managers playing golf more often than reading great management books

Carl Icahn, a famous corporate raider and ranked 53 world most richest people in 2006, used to buy major stakes of such company. He took over its dumb management, fired them all, restructured the company, and then sold it with higher price. If you have enough money to do so, I will tell you a perfect company to buy.

© http://pratolo.com Sept 2008