First, let’s get through the red flags –
- are the execs given loans that are subsequently forgiven?
- does management hog all the stock options granted in a given year, or do rank-and-file employees share the wealth too?
- is the founder or a large owner still involved as management, or does he/she still get a lot of stock options?
- do the execs have no skin in the game?
- check the related-party transactions to see if the execs’ family and friends are involved?
- is there a lot of management turnover, esp. defections? (could be sign of power struggles)
Then, the following items need to looked at –
- Is the CEO candid, or does he/she bury mistakes?
- is the management too promotional?
- can the CEO acquire and retain high-quality talent?
- does the management make the “right” / tough decisions?
- paying in RSUs vs stock options? (RSUs have to be expensed right away)
- doesn’t capitalize too many expenses
- is more focused on running the company vs. matching results for the street
- does management “follow-through” on the topics that they discussed as important in the previous calls?
- are “strategic priorities” well-explained and followed through, or do these keep changing?
- how much flexibility does firm’s strategy have?